From one side we have Donald Trump announcing a new global tariff of 15%. From the other side we have a war in Iran pushing oil prices higher. And somewhere in the middle sits the Federal Reserve, trying to decide what to do with interest rates.
Will it cut them? Will it keep them high? Or will all of this delay the next move?
Let’s start with the first major piece of news.
The Trump administration announced a few days ago a new global tariff on imports that could reach 15%. At the moment the tariff is around 10%, but according to the United States Department of the Treasury it is very likely to increase to 15%.
So when will it go to 15%?
During his interview on Squawk Box, Scott Bessent replied: “Most likely sometime this week.”
Now there is a small detail here. These tariffs are being applied through a different legal framework, which allows the administration to keep them in place for about 150 days, unless United States Congress approves an extension.
Within that time frame, however, the relevant agencies can complete the necessary studies in order to impose even more measures or make them more permanent.
In other words, there is a strong possibility that over the next few months tariffs could return to the levels that existed before the recent court decisions.
And now you might be wondering why all of this matters.
The answer is simple. Tariffs tend to be inflationary. When a country imposes tariffs on imported goods, the cost of those goods increases. And when costs rise, the prices paid by consumers usually rise as well.
As if that were not enough, there is a second factor that could influence inflation.
The war in Iran.
Every time tensions rise in the Middle East, the first market to react is usually the oil market. And when oil prices go up, almost everything is affected. Transportation becomes more expensive, production costs increase, energy prices rise, and eventually prices across the entire economy come under upward pressure.
So suddenly we have two factors that could create inflationary pressure. On one side tariffs, and on the other oil prices.
And this is where the real dilemma for the Federal Reserve begins.
Because the Fed has spent years trying to bring inflation back to 2%. And when shocks like these appear in the economy, the decision about interest rates becomes much more complicated.
Things become even more interesting because even inside the Fed there is no full agreement.
For example, Stephen Miran believes the economy is at a point where interest rate cuts could begin again. He argues that the Fed could reduce rates by about 25 basis points at each meeting, gradually bringing interest rates back toward more neutral levels.
In his view, the recent increase in short term inflation expectations is mainly driven by oil prices rather than a real resurgence of inflation. In simple terms, he does not see a serious inflation problem in the United States at the moment.
On the other hand, there are also more cautious voices. Neel Kashkari says it is still too early to draw conclusions, especially when we are talking about a war that could affect the economy in many different ways.
The key question is how long this crisis will last and how intense it will become. Because if inflation starts rising again after so many years of effort, the Fed will need to be very careful not to lose credibility in its 2% inflation target.
And this brings us to the next question: what do the markets think?
According to data from CME Group’s FedWatch, investors currently do not expect an immediate rate cut. The probability that interest rates will remain at the same level at the next meeting is quite high, suggesting that markets expect a more cautious approach from the Fed.
Even so, some analysts say we might be giving too much importance to interest rates.
According to a strategist at Deutsche Bank, the key factor supporting markets is not so much the Fed’s decisions but corporate earnings. And right now corporate earnings are growing at a rate of about 15% per year.
In fact, because stock prices have moved mostly sideways in recent months while earnings continue to rise, valuations have become somewhat more attractive.
