Tariff implementation triggers stagflation alarm on Wall Street, changes in the Federal Reserve's interest rate cut path?

According to the Zhitong Finance APP, as the effects of the new round of tariff policies gradually become apparent, Wall Street strategists are issuing warnings: the U.S. economy is sliding into a stagflation quagmire, which may severely constrain the Federal Reserve's ability to cut interest rates.

Although investors have not yet paid attention to these warning signs, multiple economic indicators show that the U.S. is about to face the dilemma of high inflation and weak economic growth. Analysts point out that the current market, aside from the U.S. dollar, has not shown obvious signs of panic— the S&P 500 index has repeatedly hit new highs this year, the U.S. Treasury index is expected to achieve its best performance since 2020, while the dollar index has fallen 8% against a basket of currencies.

Traders who believe inflation is under control are betting heavily that the Federal Reserve will cut interest rates twice this year, with the first rate cut expected as early as next month. This expectation was further reinforced after the release of a weak employment report on Friday. However, strategists warn that the comprehensive tariff policy that took effect on Thursday under the Trump administration may overturn market expectations, as price pressures are transmitted to consumers, leading to a sharp rise in inflation risks.

"The market has strong expectations for rate cuts, but the risks of rising inflation cannot be ignored," emphasized Torsten Slok, Chief Economist at Apollo Global Management, in a research report on Thursday. "The key is that the stagflation narrative in the market is continuing to strengthen." Although U.S. Treasuries saw their largest increase since the end of 2023 after the employment data was released, the yield on the 10-year Treasury bond stabilized at 4.22% this week, indicating a return to calm in the market.

Slok's views have been echoed by strategists from several institutions, including BNY Mellon, Bank of America, TD Securities, and Brown Brothers. Geoffrey Yu, a macro strategist at BNY Mellon, pointed out: "The escalating tariff policies will have a dual impact—both suppressing growth and pushing up inflation, which is a true reflection of the current economic landscape."

Data shows that the CPI rose 2.7% year-on-year in June, with inflation levels consistently above the Federal Reserve's target. Economists predict that new data to be released next Tuesday may rise to 2.8%. Analysts from Bank of America Global Research emphasized on Monday: "Inflation remains stubbornly above the target range, and we maintain our forecast that the Federal Reserve will remain on hold for the year; the current risk is stagflation rather than recession."

Minneapolis Fed President Neel Kashkari acknowledged on Wednesday that tariff policies will have a substantial impact on monetary policy and may even change expectations for two rate cuts this year. "If tariffs do indeed push up inflation, we may restart rate hikes," he stated, "the transmission effects of tariff policies still carry significant uncertainty."