Musalem pointed out that Congress recognizes the need for central bank independence, but he questioned their views on aspects like tariffs. He believes the impact of tariffs on inflation will last for 2-3 quarters. He also suggested that many economists might overlook the upcoming renegotiation of the USMCA, starting in mid-2026 and expected to continue until the end of the year. Since 28% of U.S. imports come from this area, rising tariff rates could spark another wave of inflation, which might feel more like a long-lasting issue rather than a one-time event.

Inflation and Tariffs

Recent signs indicate that inflation might be more persistent due to tariffs. The expected impact over the next couple of quarters could mean the Federal Reserve may need to postpone any planned rate cuts, challenging the market’s recent optimistic outlook. This perspective is strengthened by the latest inflation data from August 2025, which showed core CPI unexpectedly rising to 3.8%. In 2023, total U.S. trade with Mexico and Canada exceeded $1.5 trillion, highlighting the importance of this trade area. Even a slight increase in tariffs on the 28% of U.S. imports from this region could significantly impact prices. In the upcoming weeks, it might be wise to adjust positions in interest rate derivatives. We could consider lowering expectations for early 2026 rate cuts by selling SOFR futures contracts set for March and June 2026. This strategy could pay off if the Fed needs to maintain higher rates longer than what the market currently expects.

Positioning for Long Term Risks

It’s also important to start factoring in the long-term risks from the USMCA renegotiation scheduled for mid-2026. One effective approach could be to buy longer-dated options on interest rate futures, which would benefit from increased uncertainty and inflation concerns. This “second wave” of inflation risk appears to be underestimated by the market right now. The currency market also presents opportunities, especially regarding the USMCA region. If the U.S. experiences sustained inflation while neighboring countries do not, it could result in a stronger U.S. dollar. We might explore long positions in USD/MXN or USD/CAD call options expiring in mid-2026 to take advantage of potential negotiation disruptions. Create your live VT Markets account and start trading now.

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