Durham Abric, head of U.S. inflation at Citadel Securities, suggests that the Federal Reserve's path for interest rate cuts is unlikely to be disrupted by potential new tariffs from a future Trump administration. Abric noted that the Fed might overlook the temporary, tariff-driven effects on inflation, given their limited impact on monetary policy.
During Trump's first presidential term, punitive tariffs were imposed on U.S. imports, and he plans to reinstate them. While these could raise consumer prices, Fed Chairman Jerome Powell and his team are expected to avoid overreacting to such short-term economic fluctuations. Abric emphasized that previous tariffs had a limited effect on overall pricing, and new tariffs might similarly exert only temporary pressure.
Abric also highlighted that, given the Fed's inclination to lower rates, the rise in short-term real yields might be reaching its endpoint. However, expectations of stronger growth and persistent inflation could lead long-term yields to continue climbing.
Since mid-September, expectations for Fed policy rates have surged more than inflation forecasts, raising the expected terminal real rate to around 1.25%, the highest since July. Abric's remarks followed the release of key inflation data that met expectations and caused U.S. Treasury yields to decline. Long-term rates have remained elevated since the election on November 5.
Economists anticipate that higher tariffs could increase inflation risks, but the ultimate impact on consumer prices will partly hinge on workers' ability to negotiate higher wages, which could solidify inflationary effects. Conversely, a weak labor market might dampen demand and offset tariff impact.
The Federal Reserve recently cut rates by 25 basis points, with Powell indicating that the election would not influence the Fed's short-term decisions. He also mentioned that it's premature to assess the timing or substance of any potential fiscal policy changes. Despite this, companies like Stanley Black & Decker (SWK) and Whirlpool (WHR, Financial) are considering price hikes in response to tariff increases.
