Fed Rate Hike Risk in Summer Amidst Tariff-Fueled Inflation

The US economy is experiencing 3% GDP growth, supported by tech investments and defense spending. However, economist Torsten Sløk warns that Trump's tariffs could further stoke inflation.

Sløk believes that mounting inflation due to tariffs could prompt the Federal Reserve to raise interest rates at their mid-June meeting. This could surprise markets that anticipate no rate changes or even reductions this year.

Estimates suggest that the steel and aluminum tariffs could increase the core PCE price index by 0.4%. Deutsche Bank predicts inflation could exceed 3.5% if tariffs on Mexico and Canada are implemented, impacting S&P 500 earnings by 2-3%.

Goldman Sachs warns that companies may absorb higher costs or pass them on to consumers, potentially squeezing profit margins or reducing sales volumes. Sløk emphasizes that the market has not fully accounted for this rate hike risk.

Key Points:

* Strong economic growth and tariffs raise inflation concerns.
* Fed may raise rates to combat inflation in mid-June.
* Tariffs could boost inflation by 0.4-0.7%.
* Market has not priced in potential rate hikes.
* Companies may reduce profits or pass on costs to consumers.