Source: Jinshi Data

Bank of America expects that due to concerns about inflation, the Trump's administration's aggressive tariffs may force the Federal Reserve into a wait-and-see mode.

The bank's economist for the USA, Aditya Bhave, stated in a report to clients on Wednesday, "An increasing number of signs indicate that inflation is on the rise," considering the timing of the government transition, the Federal Reserve may have already completed the last interest rate cut of this cycle.

"Even before we consider fiscal loosening or tariffs, inflation is already a concerning issue. These policy changes will pose an upside risk to the Federal Reserve's core PCE forecast (our prediction is 2.8% by the end of 2025)," Bhave said. He referred to the Personal Consumption Expenditures Price Index, which is the Federal Reserve's preferred inflation indicator.

"Therefore, if Trump announces high import tariffs shortly after taking office, the Federal Reserve may not cut rates further," he added.

Import tariffs are a tax levied by the government on imported goods at customs. Although these fees are not paid directly by the USA consumers, economists warn that some of these costs will be passed on to consumers in the form of rising commodity prices. This may lead to an increase in inflation, at least in the short term.

The summary of economic projections (SEP) released by the Federal Reserve in December last year showed that policymakers expect two more rate cuts in 2025, but Federal Reserve Chairman Powell stated that only some members considered the potential impact of Trump's policies when making their forecasts.

During his first term, Trump raised tariffs and promised to expand tariffs in his second term. CNN reported on Wednesday that Trump is considering declaring a national emergency to justify the imposition of universal tariffs. However, there is still uncertainty regarding the scope of the tariffs. Some of Trump's well-known supporters oppose the idea of imposing universal tariffs.

As uncertainty surrounds Trump's tariff plans, inflation data has stagnated above the Federal Reserve's 2% target in recent months.

Investors have been adjusting down their expectations for a Federal Reserve rate cut in 2025. The Fed's benchmark overnight lending rate is currently 4.25% to 4.50%. CME's FedWatch tool shows that the federal funds futures market believes there is a 93% chance the Fed will pause rate cuts in January. However, the predictions for rate cuts throughout the year are quite diverse; as of Wednesday morning, it is most likely that there will be a total of only one cut by the end of December.

In recent weeks, yields on US Treasuries have also been steadily rising, which is another sign that traders expect interest rates to remain elevated for a longer period. At the time of writing, the yield on the 10-year US Treasury is at 4.67%, significantly higher than the levels at the end of last year.

编辑/jayden