US ISM Data Points to Resilient Growth Across Manufacturing and Services
US ISM manufacturing and services PMIs signal resilient demand, although elevated prices and weaker services employment keep the Fed cautious.
Matt Simpson
- Interest Rates
Will Trump’s Tariffs Spark Inflation?
By: Kathryn Rooney Vera, Managing Director and Chief Market Strategist
Will Trump’s Tariffs Spark Inflation?
In a recent conversation with Fiona Cincotta, StoneX Chief Market Strategist Kathryn Rooney Vera outlined a comprehensive breakdown of the economic landscape for 2025, highlighting the intricate interplay between fiscal policy, monetary decision-making, and global market dynamics set against a volatile and rapidly evolving geopolitical landscape.
Key Takeaways:
- Tariffs to impact sentiment more than inflation
- U.S. growth above potential despite inflation risks from Trump policies
- Strong dollar expected with global rate cuts
Navigating Fiscal Policy and Monetary Strategy
With 2025 underway, the U.S. economy continues to experience robust growth, marking the fourth consecutive year of above-potential expansion and Kathryn Rooney Vera believes that this sustained momentum has led to an inherently inflationary positive output gap.
The reintroduction of the Trump administration brings with it a suite of pro-growth policies, including deregulation, the permanency of previous tax cuts, and potential reductions in corporate taxes. While these initiatives aim to stimulate further economic activity, Rooney Vera believes that they also risk exacerbating existing inflation concerns, placing the Federal Reserve in a challenging position.
The Federal Reserve's Delicate Balancing Act
In response to evolving economic indicators, the Federal Reserve commenced rate cuts in September 2024, totaling 100 basis points over four adjustments. Counterintuitively, this period witnessed an uptick in ten-year Treasury yields and 30-year mortgage rates, suggesting that the underlying economic strength may be counterbalancing the Fed's accommodative measures. As inflation expectations edge higher, the Fed appears poised to maintain current rates in the near term. However, should core Personal Consumption Expenditures (PCE) — the Fed's preferred inflation gauge — escalate significantly, Rooney Vera believes the possibility of resuming rate hikes cannot be dismissed.
Implications for the U.S. Dollar and Global Markets
The interplay between U.S. economic strength and divergent monetary policies globally has reinforced the U.S. dollar's strength. Rooney Vera notes that interest rate differentials currently favor the U.S., which, when coupled with superior nominal growth compared to counterparts like the Eurozone and Japan, strengthen the dollar's position. Despite potential preferences from the administration for a weaker dollar to enhance trade competitiveness, prevailing economic fundamentals suggest continued dollar strength.
The Inflationary Impact of Tariffs
The Trump administration's tariff strategies appear to have picked up from where they left off and will primarily influence market sentiment and trade dynamics rather than directly spiking inflation rates. Rooney Vera notes that historical data indicates that previous tariff implementations did not result in substantial inflationary surges. Instead, core inflation drivers remain rooted in structural factors, notably the consumption of services and a resilient housing market.
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---Written by: Gus Farrow
---Expert: Kathryn Rooney Vera, StoneX Chief Market Strategist
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