Richmond Fed President Thomas Barkin is hesitant to lower interest rates because of ongoing inflation concerns linked to tariffs. While prices are rising above target levels, there’s no immediate need to cut rates due to a strong job market and high consumer spending. Barkin points out that companies expect prices to rise because of costly imports affecting their inventory. Moreover, some businesses not directly impacted by tariffs are raising prices, citing uncertainty in trade policies. This uncertainty makes businesses cautious, leading them to delay investments and hiring. Barkin’s stance contrasts with FOMC member Christopher Waller, who is less concerned about inflation due to tariffs. In an interview, Barkin firmly opposed quick interest rate cuts. His reasoning goes beyond current inflation, which is still above the Fed’s preference, to focus on expectations. If companies think they’ll have to deal with more expensive imports, they will start raising their final prices. This can create upward pressure on inflation even if data has not yet shown it. Barkin is also mindful that uncertainty, especially regarding tariffs, is causing some firms to raise prices, even if they aren’t directly affected. They’ve noticed that unpredictable policies allow them to increase margins without attracting too much attention. This behavioral shift among businesses is concerning. It suggests that inflation may not respond to rate cuts as we might expect. The hesitance in business investment and job creation is understandable. Firms are in a state of uncertainty, not pulling back but avoiding commitment. Without clearer trade regulations or broader economic indicators, they are holding off, leading to slower activity, which usually prompts economic stimulus. However, Barkin isn’t convinced the timing for that is right. In contrast, Waller seems less worried about inflation risks from tariffs. He may believe they are limited or temporary. This difference in opinion is significant and highlights the ongoing debate within the policy-setting group. It shows that future rate decisions may diverge. So, what comes next? As expectations for prices shift across sectors, we could see more underlying dislocations. Timing becomes trickier when rates lack clarity and inflation remains a pressing concern. It’s wise to be cautious about rate futures, especially when committee members have differing opinions. We should examine how inflation-linked instruments are performing compared to shorter-term rates. Dislocations may present opportunities or signal when to avoid risky positions. For example, short options might seem appealing initially, but failing to consider the persistent nature of trade-induced inflation could lead to unexpected costs. It’s essential to look beyond the next policy meeting. Observing how forward rate agreements change as businesses adjust pricing strategies will likely provide better positioning insights. For now, risks are not fading; they are just quieter.

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