A 'sidelined' Fed faces a new highstakes dilemma that echoes its last big error Hamza ShabanJuly 16, 2025 at 5:00 AM This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with: The Chart of the Day What we're watching What we're reading E...
- - - A 'sidelined' Fed faces a new high-stakes dilemma that echoes its last big error
Hamza ShabanJuly 16, 2025 at 5:00 AM
This is The Takeaway from today's Morning Brief, which you can sign up to receive in your inbox every morning along with:
The Chart of the Day
What we're watching
What we're reading
Economic data releases and earnings
Tariffs have finally caught up to the conversation about tariffs.
The price increases that businesses and economists have warned about for months have started to seep into the "hard" data, showing inflation accelerated in June for imported products entangled by the new trade policy.
While the rising pricing pressures were expected, there are larger implications at play for the Federal Reserve. Tariffs are one of the obstacles standing in the way of the central bank's inflation target of 2%. And the latest confirmation that import duties will raise costs boosted the chances of the Fed remaining on the sidelines.
Market bets reinforced the idea of a stationary Fed, at least for a few more months. The lock on expectations for no rate change in July intensified to a near certainty, rising to 97%, according to the CME FedWatch tool on Tuesday.
"The heating up of inflation in June, while close to expectations, is a step in the wrong direction that will keep the Federal Reserve on the sidelines at the upcoming July FOMC meeting," Scott Anderson, chief US economist at BMO Capital Markets, wrote in a note.
And the likelihood of another Fed meeting ending without a cut also increased for September, rising from 37% a week ago to 44%, after the latest inflation report.
There's a way to interpret the inflation reading that suggests tariffs will have a much more muted impact on the overall economy than many market observers had feared. It's true that prices for goods, including furniture, clothing, and appliances, ticked up. But overall inflation remained relatively modest.
Part of that more optimistic take also views tariff-related inflation as part of a one-time price increase that the Fed should look past, a fleeting moment, rather than a destabilizing paradigm shift leading to escalating prices. It may be — to use a word that may make Fed officials shudder, given the last time they used it and got it wrong — transitory.
But there are issues with this rosier read. Even if the tariffs' impact turns out to be momentary, which isn't a sure thing, the fresh rounds of tariff threats and uncertainty around the White House's dealmaking could produce future price shocks, each with its own ripple effects that will take time to suss out and measure.
"If the recent tariffs announced/threatened go into effect, it will take a few months for that additional boost to inflation to be felt in goods prices and will keep the Fed on the sideline unless the labor market takes a sudden turn for the worse," Ryan Sweet, chief US economist at Oxford Economics, wrote in a note on Tuesday.
And if what seems like it could be transitory turns out not to be, then the Fed could find itself replaying its nightmare inflation scenario of the post-COVID inflation boom that bore the inflation monster it's still trying to defeat.
For now, inflation isn't hot enough and the labor market isn't cool enough for the Fed to take action. It's possible the tariffs we've seen won't generate lasting inflationary pressures and that the central bank can resume its cutting. But a report that didn't rattle policymakers or the market is also one that invites more waiting.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.
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