The US Fed Reserve should be careful in reducing interest rates in light of tariff uncertainties. In a report, Union Bank of India said that new tariffs would add to inflation next year. This will make policy choices especially critical for the next quarter of three months.

It stated that markets are anticipating a 60 basis point reduction in the Fed rate in 2025. That is to be followed by another 70 basis point reduction in 2026. The Fed needs to time its policy moves appropriately.

Investors believe that any price increase induced by tariffs will be temporary. Their reasoning is twofold: first, the inflation boom is expected to subside after the one-time adjustment for higher import costs is completed by the end of 2025. Second, slow economic growth and rising recession risks will reduce demand. This will keep inflation under control. It said that supply chains are expected to adjust towards non-tariff sources by 2026. This will further reduce price pressure.

As a result, markets are looking beyond short-term inflation growth. They anticipate that a weakening economy will create scope for the Fed to reduce rates more aggressively. However, the report warns that the situation is still stable and needs to be monitored closely.

According to the report, the performance of the US economy in the first half of 2025 has been mixed. Hard data such as real economic output and employment, have been more positive than survey data. This divergence has been a major trend in recent months. The impact of tariffs will start showing on the market in the coming months.

The US Fed Reserve should be careful in reducing interest rates in light of tariff uncertainties. In a report, Union Bank of India said that new tariffs would add to inflation next year. This will make policy choices especially critical for the next quarter of three months.

It stated that markets are anticipating a 60 basis point reduction in the Fed rate in 2025. That is to be followed by another 70 basis point reduction in 2026. The Fed needs to time its policy moves appropriately.

Investors believe that any price increase induced by tariffs will be temporary. Their reasoning is twofold: first, the inflation boom is expected to subside after the one-time adjustment for higher import costs is completed by the end of 2025. Second, slow economic growth and rising recession risks will reduce demand. This will keep inflation under control. It said that supply chains are expected to adjust towards non-tariff sources by 2026. This will further reduce price pressure.

As a result, markets are looking beyond short-term inflation growth. They anticipate that a weakening economy will create scope for the Fed to reduce rates more aggressively. However, the report warns that the situation is still stable and needs to be monitored closely.

According to the report, the performance of the US economy in the first half of 2025 has been mixed. Hard data such as real economic output and employment, have been more positive than survey data. This divergence has been a major trend in recent months. The impact of tariffs will start showing on the market in the coming months.