Institution: The Federal Reserve to Downplay Temporary Inflation Impact from Tariffs

Nordea Bank points out that while risks are rising, the Federal Reserve is waiting for more clarity. Trade policy and economic outlook are seen as extremely uncertain, and the Fed hopes to wait for more definitive results. The market interprets this information as slightly hawkish, further reducing the likelihood of a rate cut at the June meeting. We agree with this market shift but expect the Fed to ultimately focus on supporting economic growth and ignore the temporary rise in inflation. If long-term inflation expectations remain within a controllable range and align with the inflation target, the Fed should be able to overlook the temporary inflation shock caused by tariffs.

There is also a possibility that the short-term impact of tariff uncertainty on the economy will exceed current expectations. However, for now, the Fed believes the move has a limited impact on the economy, and there are signs of some progress in trade negotiations. Inflation remains above target and is expected to start rising again due to tariffs.