The Federal Reserve enters next week’s policy meeting at a crossroads. Inflation data for May have calmed market nerves. Both the Consumer Price Index and the Producer Price Index came in below expectations, fuelling the view that the Fed can afford to wait. But Dr Komal Sri-Kumar disagrees. “That would be a mistake,” he writes, warning that current calm is masking brewing pressures—geopolitical, fiscal, and currency-driven—that could soon erupt.
Oil prices have already jumped following renewed conflict between Israel and Iran. Yet many investors and policy analysts are still treating inflation risks as muted. “Analysts and policymakers who have been sanguine on the inflation front despite the imposition of the Trump tariffs are facing a yellow light,” Sri-Kumar notes, pointing to the inflationary impact that hasn’t yet registered in official data but is looming.
Tariffs imposed earlier this year are only beginning to pass through supply chains. Sri-Kumar expects the real effects to hit in the second half of 2025 and into 2026. With President Trump now pledging new unilateral tariffs within weeks, inflation expectations may be jolted again. This, he writes, would not only drive import prices higher but “reignite trade tensions that had been dormant.”
Currency markets are also flashing warnings. The US dollar has weakened materially since January, now trading at its lowest levels since March 2022, as measured by the DXY index. That weakness has persisted even during a major geopolitical escalation. “Even the new conflict in the Middle East did not lead to a significant appreciation in the dollar as a safe haven,” he observes. Instead, gold—what he calls “the ultimate refuge from risk”—has surged.
This matters because a weaker dollar compounds the inflationary impulse of tariffs. “When a weaker dollar is layered on top of new tariffs, the risk of cost-push inflation rises meaningfully,” Sri-Kumar warns. He draws a parallel with past episodes of currency-driven inflation and cautions that markets may be underestimating the combined effect.
The uncertainty extends beyond economics. Tariff policy has become unpredictable. Apple’s attempt to shift iPhone component sourcing from China to India to sidestep earlier tariffs was met with a new threat: potential levies on Indian imports too. “Policy could change in a matter of minutes,” Sri-Kumar writes. This instability delays corporate decisions, worsens supply bottlenecks, and fuels broader inflation risks.
Meanwhile, financial markets are pricing in rate cuts and celebrating the lack of bad news. Sri-Kumar sees this optimism as misplaced. “That celebration is premature,” he says. Domestic demand remains strong, wages are rising faster than productivity, and asset prices continue to reflect a risk-on environment. “These are not signs of an economy needing easier monetary policy,” he warns. “They are signs of an economy running the risk of overheating.”
Trump’s pressure campaign on the Fed continues, with calls for a full percentage point rate cut. But Sri-Kumar is clear on what’s at stake. “The Fed’s responsibility is not to the White House or to Wall Street,” he writes. “A reactive Fed is a weak Fed — and a weak Fed ultimately loses its ability to anchor expectations.”
His recommendation is blunt: raise rates. “A modest 25 basis-point rate hike next week would send a critical signal,” he argues. It would show the Fed is looking ahead, not behind. It would reaffirm the central bank’s independence. And it would reduce the risk of having to hike more aggressively later on. “Waiting would be a concession to complacency,” he concludes. “Acting now is a commitment to stability.”
This article quotes views expressed by Dr Komal Sri-Kumar in his weekly commentary. These are his personal opinions and not financial advice. Always consult a qualified adviser before making investment decisions.
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