Analysts at Columbia Threadneedle indicate that in the coming months, investors face risks from potential interest rate hikes by the Federal Reserve as well as significant interest rate cuts.
Edward Al-Hussainy, a senior interest rate and currency analyst for Columbia Threadneedle, stated that if the Federal Reserve needs to raise rates to curb inflation, investors could be in a difficult position next year.
Al-Hussainy mentioned at a press conference on Tuesday that the likelihood of rate hikes is only about 15%, but he noted that the Federal Reserve may raise rates within the next 12 months.
He stated that this could happen if the large tax and spending bill passed by the Republicans in the Senate ultimately stimulates economic growth, and the final pass-through of tariffs may also exert upward pressure on inflation.
Over the past few months, inflation data has surprisingly cooled, but it is expected that tariffs will increase business costs at some point soon, which may also raise household costs. According to the Yale University Budget Lab, the average tariff on imported goods in the U.S. is currently around 15%, the highest level since 1938.
Goldman Sachs' chief economist Jan Hatzius mentioned in a report to clients over the weekend, "It is still too early to sound the alarm on tariff-driven price increases."
Al-Hussainy indicated that if the Republicans' budget plan or tariffs prevent the Federal Reserve from keeping inflation close to its annual target level of 2%, the Fed's short-term policy interest rate may need to be raised.
On Tuesday, Federal Reserve Chairman Powell told Congress that achieving a 'neutral' interest rate level that neither stimulates nor restricts the economy would require 'a few rate cuts, if not more.' He also stated that tariffs are expected to significantly raise inflation this year.
On Tuesday, President Trump posted on Social Media, urging his 'Senate friends to lock themselves in a room if necessary,' and to reach an agreement on the budget bill he signed 'this week.' Trump also stated in another post that interest rates 'should be lowered by at least two to three percentage points.'
The Federal Reserve lowered its short-term policy rate by 100 basis points in 2024, but has kept it unchanged since January, maintaining the rate in the Range of 4.25% to 4.5% while awaiting the resolution of tariff uncertainty.
However, Al-Hussainy noted that another 'tail risk' facing the market is that the labor market may start to collapse in the coming months, prompting the central bank to cut rates more than investors currently expect.
Al-Hussainy pointed out that both potential rate hikes and substantial rate cuts are scenarios that the market 'has not yet priced in.' He noted that the Federal Reserve and Wall Street expect to cut rates by about 100 basis points by the end of 2026.
Rate hikes could pressure the stock market, which is currently close to record highs, squeezing corporate profits and putting downward pressure on older bonds with lower yields.
