The economy entered the first quarter with robust conditions, as markets are functioning effectively. However, current tariffs are likely to increase inflation pressures.
Trade issues with China are significant for the economy, creating uncertainty for investors. The tariffs currently in place are notably high, which complicates the economic landscape.
Impact Of Tariff On Inflation
While growth is expected to slow, not decline, financial market movements remain important to monitor. It is uncertain when tariffs will impact inflation, but expectations are for inflation to exceed 3% this year.
Long-term inflation expectations show mixed results, and the Federal Reserve may need to maintain its current stance for an extended period. Strong employment and decreasing inflation rates contribute positively, but trade tensions hinder further rate cuts.
We began the quarter with solid economic momentum, and it’s plain to see that markets are running smoothly for the most part. But there’s an issue brewing—current tariff levels are placing upward pressure on certain price categories. It’s not across the board just yet, though the risk of spilling over is real if left unchecked for much longer.
The tensions with China, now fairly well entrenched, are stirring worry across investment desks. These aren’t small-scale disputes; the tariffs in place are relatively steep and are already disrupting certain supply chains. What this does, of course, is rattle confidence—investors start second-guessing positions they would’ve otherwise held. It also nudges forward uncertainty in pricing models, which is a serious matter when projecting volatility.
Financial Market Movements And Implications
What’s key here is the balance. We are looking at an outlook where growth will not reverse outright, but the rate of expansion may ease off. That’s not necessarily bad if managed properly, but it does mean there’s little margin for policy error. Movements in the financial markets will increasingly carry weight over the next several weeks. Options markets, for example, should be approached with extra care—price moves are likely to reflect sentiment swings more than pure fundamentals in the near term.
Regarding inflation, projections above 3% are grounded in both forward-looking indicators and historical reactions to past tariff regimes. The true impact of the tariffs may well take a few quarters to filter through, but price pressures are already materialising in raw input categories. So for us, timeframes now need to stretch beyond the immediate and consider medium-term scenarios when building risk frameworks.
We’re also seeing expectations for long-term inflation divide. Some indicators still show confidence in the Fed’s ability to constrain price growth, while others suggest these pressures may persist stubbornly longer than expected. This split should drive different implied volatility patterns depending on tenor. A flatter or inverted volatility term structure could point to confusion—not something you want to be caught on the wrong side of.
Powell’s current position reflects this complexity. Keeping rates steady in this context is a tactics-based decision, not one of strategy. The Fed isn’t trying to stir borrowing or cool it too much—they’re holding their fire until the data turns more conclusively one way or the other.
With the labour market still firm and some core inflation elements slowing, betting heavily on more cuts from here looks speculative at best. The sticky trade tensions interfere; they inject just enough instability into global flows to keep caution in play. So, for those of us following moves in futures and swaps, it’s clear we must now pay far more attention to global trade developments than we may have previously done.
