As the market focuses on the Federal Reserve's meeting this week, former Federal Reserve Vice Chairman and current Pimco Global Economic Advisor Richard Clarida has issued a new warning—the Fed's battle with inflation is "far from over." He pointed out that although core inflation has eased recently, Trump's high tariff policies may exert new upward pressure on prices in the coming months.
Inflation Concerns Remain: Improved Data May Be Just a "Temporary Phenomenon"
Clarida noted that PCE inflation data for April and May was indeed lower than expected. April PCE grew by 2.1% year-on-year, continuing to fall from March's 2.3%, hitting a post-pandemic low, which is encouraging. However, he warned that businesses have been pre-stocking significantly earlier this year, which may have delayed the real impact of rising costs on consumer prices.
He emphasized: "We do expect tariffs to eventually seep into the inflation data. Currently, the average effective tariff faced by U.S. consumers is as high as 15.6%, the highest level since 1937. Although it seems less drastic than the 'Liberation Day tariffs,' its impact should not be underestimated."
Inflation May Return to 3%, Rate Hike Risk Is Low but Rate Cut Magnitude May Be Limited
Clarida stated that in the coming months, U.S. inflation could climb back to around 3%, leading the market to revise its expectations for the rate cut path. "Even if rate hikes do not resume, rising inflation will force the Fed to be more cautious with its rate-cutting pace."
Amid this concern, the upcoming FOMC economic forecast summary is particularly noteworthy. Clarida indicated that the real focus is not on whether rates will be adjusted, but whether the "dot plot" still shows two rate cuts this year or if expectations will be lowered to just one.
Trump Continues to Pressure, Fed Faces Dual Pressures of Politics and Economics
Reportedly, U.S. President Trump has once again publicly pressured Federal Reserve Chairman Powell, demanding a rapid rate cut and insinuating a possible leadership change if policy does not align. Although the mechanism protecting the chairman's term makes dismissal difficult, political influence undoubtedly exacerbates market tensions.
Federal Reserve executives have previously stated that they will closely monitor the inflation impact of Trump's tariff policies and remain data-driven. Currently, it seems that the key to rate cut space lies in whether the inflation trajectory can continue to decline or rebound due to external policy interventions.
Market Reaction Mild, Traders Focus on Policy Changes Before December
According to the CME "FedWatch" tool, the market still expects two rate cuts in 2025, with the first likely occurring in September, and the year-end policy rate expected to fall in the 3.75%-4% range. This expectation has not changed significantly due to tariff impacts, but if the FOMC dot plot adjusts the number of rate cuts, it might lead to a short-term rise in U.S. bond yields and a stronger dollar.
Interest rate uncertainty also affects the gold and U.S. stock markets. Gold prices fluctuate between alleviated inflation pressure and wavering rate paths, while the stock market relies more on liquidity support and the Fed's "dovish temperature" statements.
Extended "Observation Period" for Policy, Market Needs to Beware of Inflation Reversal Risks
Clarida's remarks remind investors once again that the Fed's anti-inflation campaign is perhaps far from over. The upcoming FOMC meeting is not only a policy setting but also a challenge in managing market confidence. Under the dual pressures of inflation and political gamesmanship, how the Fed maintains the dual bottom lines of "price stability" and "policy independence" will determine the general direction of asset prices in the second half of the year.
