Growth in the economy appears to have slowed, with surveys indicating caution among both businesses and consumers. The Federal Reserve’s patience with current policy is deemed appropriate as it collects evidence on whether inflation is returning to its target level.
There are increasing risks that inflation may either stall above 2% or rise further in the near future. Concerns are present regarding the assumption that all price increases linked to tariffs will be temporary, as second-round effects could prove more enduring.
Labour Market And Inflation Risks
If the labour market remains robust and these effects become clear, the Fed may need to maintain higher rates longer or adopt a more restrictive stance. The prevailing expectation is for continued strength in the economy and job market, along with a decline in inflation.
This moderation in economic growth suggests a more cautious sentiment from businesses and households alike. Surveys imply a hesitancy to commit to expansion or spending, likely influenced by uncertainty surrounding future monetary policy and broader economic conditions. The Federal Reserve’s approach reflects a desire for clear signs that inflation is firmly aligning with its intended target before making adjustments.
Risks to inflation remain unsettled. The possibility that it could level off above the 2% mark or even push higher adds complexity to future policy decisions. Rising costs due to tariffs are widely expected to be transitory, yet the assumption may not hold if businesses pass these costs along more permanently. Secondary effects from earlier price increases still have the potential to embed themselves in pricing behaviour, creating challenges in bringing inflation down further.
Economic Resilience And Policy Outlook
Steady demand for workers supports this risk assessment. Should hiring remain strong and wages continue rising, inflationary pressures could persist at uncomfortably high levels. If this materialises, further reductions in interest rates would not just be delayed—they might require a reversal in expectations. Holding rates higher for an extended period would remain a likely course of action, while discussions of tightening policy further may not remain theoretical. The widely held view assumes gradual disinflation alongside economic resilience, but confidence in this outcome rests on assumptions that may still be tested.
