We were in the camp that the Federal Reserve (Fed) should have reduced interest rates during the first half of the year, taking advantage of the underlying disinflationary path during that period. Furthermore, we think the disinflationary path is still in motion today and will continue during the next several quarters, helped by a continuous slowdown in shelter prices. However, the prospects for further rate cuts past December does not look that promising, especially if the US economy starts to strengthen during the first half of the year, as we expect, and/or there is any truth to the tariff refund President Donald Trump has been promoting in social media.
Although it is true that inflation increased everywhere in the world as the global economy started to reopen after the pandemic closures, the stickiness and the perseverance of inflation in the US was supported, during both the Trump and Joseph Biden administrations, by the monumental income transfers the federal government made to individuals and firms during that period. This was a perfect storm, with supply chain issues affecting supply and pushing prices higher at the same time that aggregate demand expanded as Americans started to spend the excess savings accumulated during the pandemic.
Today’s tariff-driven increase in inflation is expected to be a one-off increase in prices that will have a very short runway, as Americans will have to make tough decisions and cut other expenditures in order to buy those goods affected by the increase in tariffs and/or adjust consumer behavior so as to minimize the impact of these tariffs on individual and family budgets.
However, if the Trump administration goes forward with this idea of sending a $2,000 check to Americans earning less than $100k (according to recent news) to help them confront higher prices due to tariffs and/or to compensate them for the increase in health care costs, then all bets are off for inflation as well as for interest rates, as the Federal Reserve will have to stop lowering interest rates and may even have to point to higher interest rates in the not so distant future.
But the $2,000 check is not only bad in terms of inflation as well as interest rates, it is even more negative for the US’s fiscal and debt path, as shown by the Congressional Budget Office estimate in the graph above. That is, for the first time in decades, Republicans have agreed to increase taxes, and tax revenues are flowing at a rate of ~$350 billion per year. However, these tax revenue flows are not going to be permanent. If, as the Trump administration argues, these tariffs are going to bring back production to the US, then this means that, over time, these tariff revenues are going to come down compared to what is being raised today. Thus, these extra tax revenues should be used to lower the fiscal deficit rather than given back to consumers.
The fact of the matter is, as we have said so many times in the past, we are spending too much and/or taxing too little, and these policies, on the expenditure as well as on the taxing side, are bankrupting our country. Politicians’ persistent preference for higher spending and lower taxes may weigh on future growth. Timely action is essential to prevent reaching a critical tipping point. While measures like reducing spending or increasing taxes are often unpopular, long-term stability may require decisions that prioritize the country’s future over short-term political considerations.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.
The FHFA HPI is a broad measure of the movement of single-family house prices. The FHFA HPI is a weighted, repeat- sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
The ISM Manufacturing Index: The GDP Now Institute of Supply Management (ISM) Manufacturing Measures the health of the manufacturing sector by surveying purchasing managers at manufacturing firms. The survey asks about current business conditions and expectations for the future, including new orders, inventories, employment, and deliveries.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 10/17/2025
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