Rising inflation, tariffs may delay Fed rate cuts through year-end
The Federal Reserve (Fed) has maintained a cautious stance ahead of proceeding with a reduction in the prime rate, a factor that has kept economic agents in suspense over when and by how much the Fed might ease monetary policy.
In issue No. 12 of “Al Punto,” the Federal Reserve’s June 18 decision to maintain its prime interest rate in the 4.25% to 4.5% range and its projections of two rate cuts later this year were discussed.
The Federal Reserve emphasized that before making any decision, it needed clear signals about the course of inflation and economic growth — two uncertainties given the dynamic nature of the tariff policy. This left borrowing costs high.
At the end of June, the Fed chairman reiterated his concern about the inflationary impact of tariffs, also noting that their effects on the economy were unknown amid the intense debate on this issue.
The tariff landscape has changed numerous times. On April 2, President Trump announced his “Liberation Day” on trade, during which he announced higher tariff rates than those prevailing at the time for a long list of countries. These were put on hold until July 7 to allow time for negotiations.
The landscape changed again when it was announced on July 7 that new tariffs would be imposed on a group of 14 countries, including Japan and South Korea, on Aug. 1. Given this fluidity in tariff policy, it remains to be seen how the tariffs will be implemented and what their impact will be.
Notwithstanding the above, financial markets are betting on a 0.25 basis point cut at the next Fed meeting in September, followed by one or two more downward adjustments by the end of the year. This would leave the benchmark rate in the range of 3.75% to 4%.
However, the path of interest rates will depend on the performance of the U.S. economy and inflation. If inflation picks up, given the Fed’s mission, the likelihood of rate cuts would be reduced. The same would happen if the economy shows signs of strength.
Through May, headline inflation remained stable, but the Consumer Price Index (CPI) rose 0.3% in June, for an annual increase of 2.7%, compared to 2.4% in May. This was the sharpest increase in inflation since January. This confirms expectations of rising inflation, which, if this trend continues, could postpone the long-awaited reduction in the prime rate.
To date, there are also no signs of a deterioration in the U.S. employment market, indicating that the economy remains resilient. This would mean, among other things, that the cost of short-term debt in Puerto Rico could remain unchanged throughout the year.
Author Leslie Adames is director of Economic Analysis and Policy at Estudios Técnicos Inc.
