EC Markets: Is the Federal Reserve Cornered? Tariffs Spark New Inflation Concerns in the U.S.

In early 2025, U.S. inflation had shown signs of easing, but new tariffs and policy uncertainty created new risks for traders.EC MarketsWith March's CPI data expected to confirm a cooling inflation trend, the market is currently reassessing the inflationary impact of comprehensive trade measures and the Federal Reserve's possible response.

Inflation had cooled before the tariffs were implemented

The March CPI is expected to show annual inflation falling to 2.6% from 2.8% in February. Core inflation is expected to dip slightly to 3.0%. The moderation in energy and gasoline prices has fueled this modest trend, with headline inflation rising by just 0.1% month-on-month and core inflation rising by 0.3% month-on-month. The data suggest continued progress towards the Fed's 2% target and reinforce the post-epidemic disinflationary trend. But commodity prices have already started to strengthen in February and March, raising early concerns that the cooling trend could reverse as new policies take effect.

Tariffs bring direct and indirect price pressure

With the implementation of President Trump's tariffs, the economic landscape has changed significantly, including the imposition of 20 per cent tariffs on Chinese goods, steel and aluminium, as well as auto tariffs that went into effect on April 4. Additional "reciprocal" tariffs on a wide range of trading partners have fuelled inflation expectations. UBS warned that if the measures were fully implemented, inflation could approach a peak of 5 per cent. Capital Economics offered a more dovish view, suggesting that inflation could peak around 4 per cent.

The tariffs are expected to push up prices through the cost of imports and the cost of domestic supply chains in the United States. Early signs of inflation are already being seen in categories such as clothing, electronics and automobiles. Retaliation from China and the European Union is also escalating, though the White House responded to a global outcry by briefly cutting some tariffs to 10 percent.

The Federal Reserve faces a policy dilemma

The Federal Reserve is now in a dilemma between slowing economic growth and rising inflation. Before the tariff news was announced, the market was already expecting a rate-cutting cycle to begin in the middle of the year. Traders now see a 33% chance of a rate cut in May and a 63% chance of four cuts by the end of the year. However, Chairperson Powell has signaled a cautious stance, citing uncertainty and urging patience. The Fed meeting notes acknowledge the inflationary impact of the tariffs and report that some companies are already passing on higher costs.

market forecast

The recent cooling in inflation could soon give way to tariff-driven price spikes. With the Fed reluctant to act too soon, traders should brace for higher consumer costs, greater volatility and greater sensitivity to upcoming CPI and Fed decision dates. A wait-and-see attitude remains the central bank's posture, but market risks are rising.