Fed’s Easing Expected Despite Inflation Risk Ahead
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Economics Research15 Aug 2025
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US: CPI print provides room for modest rate cuts. July’s CPI print (headline: 2.7% y/y, core: 3.1% y/y) was in line with expectations. The data offered a mixed picture—goods prices were broadly well-behaved with tariff-relevant categories like toys and furniture yet to show any spikes, but services prices were on the strong side with airfares, medical care, and recreation picking up pace. There was a rebound in used-auto prices as well. Inflation momentum, measured as the 3-month/3-month rate, annualised, picked up.

If Fed officials remain focused on inflation, they will find areas to worry about. On tariffs, the playbook is clear; US firms are (i) squeezing suppliers, (ii) taking a hit on their balance sheet, and (iii) passing on parts of the tariff to consumers. (i) and (ii) are most visible now, and (iii) is also materialising in a protracted manner.

Regional manufacturers are reporting the highest price pressure since the summer of 2022 when inflation was hovering around 9%. Whether measured by Dallas Fed’s trimmed mean inflation on an annualised basis or indicated by the lead-lag relationship with money supply, forward looking indicators are pointing toward rising inflation ahead.

There are other risks to inflation, ranging from a weaker dollar to an apparent bottom in energy prices. Additionally, the ongoing crackdown on undocumented workers is creating a supply crunch in agriculture, fisheries, construction, and recreation. This could feed into higher wage costs first and higher prices shortly thereafter.

Fed officials, however, may be shifting their focus. Looking at the jobs market where the goods sector looks lacklustre, and overall hiring appears to be propped up temporarily by the public sector, there are several pockets of concern. Combine this with weak PMI readings and a loss of momentum in retail sales, the Fed may be heading toward focusing on the demand side of the economy which would push it toward cutting rates. We are looking at two 25 bps cuts before the year is over.

By increasing the odds to 106.8%, the futures market has fully priced in a 25 bps cut while treating a 50 bps cut as a live but minor possibility for an insurance cut. The Trump administration has been on a messaging blitz before the event, overshadowing Fed Chair Jerome Powell’s cautious, data-dependent stance on monitoring the impact of tariffs on inflation. US Treasury Secretary Scott Bessent has gone from calling for a 50 bps cut to stating that interest rates should be 150 bps lower than current levels. Having fired and replaced the Bureau of Labour Statistics Chief and working to fill the Fed with like-minded Fed candidates on rate cuts, President Trump’s playbook will likely continue to involve publicly disputing Powell’s assessment of growth and inflation, positioning any dovish tilt as a victory resulting from his pressure campaign.

Figure 1: Forward looking indicators are pointing towards rising inflation ahead

Source: Dallas Fed, Bloomberg, DBS




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