The U.S. Federal Reserve will need to carefully time its interest rate cuts over the next three to six months, as new tariff measures could push inflation higher in 2025, according to a recent report by Union Bank of India. The report emphasizes that policy decisions during this period will be particularly crucial, given the potential for inflationary pressure and the broader economic outlook.
Markets are currently anticipating a 60 basis point (bps) reduction in the federal funds rate in 2025, followed by an additional 70 bps cut in 2026. This market expectation persists despite warnings from some economists that fresh tariffs could trigger a short-term spike in inflation.
“The Fed must time its easing carefully,” the report stated, highlighting the delicate balance between supporting growth and managing price stability.
Investors, however, appear to be looking beyond the near-term inflation risks. Their optimism is based on two key assumptions: first, that the inflationary impact from tariffs will be temporary, subsiding by late 2025 as businesses adjust to higher import costs; and second, that a slowing economy and rising recession risks will suppress demand, keeping underlying inflation in check.
By 2026, the report expects global supply chains to adapt by shifting toward non-tariff sources, which would further help ease inflationary pressures. As a result, markets are betting that the Fed will have both the opportunity and the necessity to cut rates more aggressively in the coming years.
Still, the report strikes a note of caution, warning that the outlook remains volatile and will require close monitoring.
In assessing the current state of the U.S. economy, the report notes a divergence between “hard” data — such as GDP and employment figures — which have been relatively strong, and “soft” data — including surveys and sentiment indicators — which have been less encouraging. This contrast has been a defining feature of the first half of 2025.
Going forward, the impact of tariff measures on inflation and economic momentum is expected to become clearer, potentially influencing future market expectations and Fed policy decisions.
