Next 3-6 Months Key, US Fed Must Go Slow on Rate Cuts Amid Tariff Moves: Report

The US Federal Reserve will have to time rate cuts very carefully as the new tariffs could possibly push inflation higher next year, which will make policy choices over the next three to six months crucial, as per a Union Bank of India report.

What Did The Report Say?

According to the report, markets are currently pricing in a 60 basis points (bps) cut in the Fed rate during 2025, followed by an additional 70 bps cut in 2026.

This is happening despite warnings from some academics that tariff measures could lead to a jump in inflation in the near term.

"Policy choices over the next three to six months are crucial. The Fed must time its easing carefully," the report highlighted.

Investors believe that any tariff-driven price rise will be temporary, according to the report. The reason behind this is two-fold, first, the inflation bump is expected to fade once the one-off adjustment to higher import costs is completed by late 2025, second, slowing economic growth and rising recession risks will curb demand, keeping underlying inflation under control.

Additionally, by 2026, supply chains are expected to adjust toward non-tariff sources, which would further ease price pressures.

Consequently, markets are looking beyond the short-term inflation flare-up and are betting that a weakening economy will provide the Fed with both the room and the need to ease rates more aggressively.

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