BofA "If the US Implements Aggressive Tariffs, the Fed Will Hold Off on Rate Cuts"

'Inflation Already at Worrying Levels with PCE Upside Risk"

CME FedWatch Predicts "One Rate Cut This Year"

Bank of America (BofA) expects that if the Trump administration pursues aggressive tariff policies, the Federal Reserve will hold off on rate cuts this year.

According to CNBC on the 8th (local time), Bank of America noted in a memo to clients that "signs of sticky inflation are increasing." Considering the timing of the transition to the Trump administration, the Fed may have already completed the last rate cut of this cycle in December.

Aditya Bhave, a U.S. economist at the bank, said, "Even before considering fiscal easing or tariffs, inflation has already entered a worrying stage." This change poses a risk of increasing the Personal Consumption Expenditures (PCE), a price indicator emphasized by the Fed. Therefore, "if Trump announces large-scale tariffs immediately after taking office, the Fed may halt rate cuts," he said.

Tariffs are taxes imposed by the government on imports. Economists warn that while U.S. consumers do not directly pay tariffs, some of the costs will be passed on in the form of higher product prices. This could lead to inflation, at least in the short term.

According to the economic outlook of individual policymakers released by the Fed in December, central bank officials expect two rate cuts in 2025. Jerome Powell, the Fed Chair, stated that some members made predictions considering the potential impact of Trump's policies.

Trump increased tariffs during his first term in the White House and has pledged to expand tariffs in his second term. CNN reported that Trump is considering declaring a national economic emergency to justify the imposition of universal tariffs.

However, even Trump's well-known supporters are negative about universal tariffs.

The CME FedWatch tool, which predicts the likelihood of rate cuts based on the futures market prices of federal funds rates, sees a 95% chance that the Fed will not cut rates in January. It also expects only one more cut for the entire year by the end of December.

On this day, the 20-year Treasury yield broke through 5%. The steady rise in Treasury yields in recent weeks is a signal that traders expect rates to remain high for longer. On this morning, the 20-year Treasury yield surpassed 5%. The 10-year Treasury yield rose from 4.178% at the end of November to over 4.7% today.

Guest reporter Kim Jung-ah kja@hankyung.com