The Fed’s Balancing Act: Patience Amid Tariff-Driven Uncertainty

In this timely analysis, PIMCO economists Tiffany Wilding and Allison Boxer examine the Federal Reserve’s cautious stance as trade tensions reshape the U.S. economic outlook.

Key Insights:

• No Rush to Cut: Fed likely to wait for clear labor market weakness before reducing rates, potentially until late summer or fall.

• Tariff Impact: Higher tariffs risk stagflation—slower growth with temporarily elevated inflation, complicating monetary policy.

• Inflation Expectations Rising: Worryingly, short and long-term inflation expectations are creeping back to pandemic-era highs.

• Historical Playbook: History suggests tariffs in high-inflation periods push central banks to hold or hike, not cut.

• Strategic Patience: The Fed is in a “good place” now, but tough decisions loom as economic data evolve.

Next Step:
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