Slowing US inflation opens the door to a June interest rate cut

Last month’s decline in inflation raises the possibility that the US Federal Reserve will resume cutting interest rates by mid-year. However, concerns remain that US tariff increases could fuel inflationary pressures, potentially causing an economic slowdown, or both, according to Reuters, as reviewed by Al Arabiya Business.

A government report released on Wednesday showed that consumer prices rose 2.8% in February compared to the previous year, indicating progress compared to January’s reading of 3%.

As long as the labor market remains strong, continued decline in inflation could allow the Federal Reserve to gradually reduce interest rates.

However, it’s worth noting that February’s data predates the escalation of the trade war, which could derail progress in reducing inflation and negatively impact the labor market. This could force the Federal Reserve to choose between keeping interest rates high to curb inflation or cutting them to support the labor market. Krishna Guha, an analyst at Evercore ISI, wrote that he still believes core inflation is on a downward, oscillating trend, excluding the impact of tariffs, which could allow the Federal Reserve to cut interest rates in June if the Trump administration eases its trade policy.

For his part, Federal Reserve Chairman Jerome Powell has stated that he wants to wait to see the full economic impact of Trump’s policies, which also include tax cuts, increased spending, regulatory easing, and stricter immigration laws. The central bank is widely expected to maintain its current interest rate range of 4.25%-4.50% at its meeting on March 18-19.

Futures traders are betting that the Fed will make three quarter-point rate cuts by the end of 2025, starting in June.

This month, President Trump doubled tariffs on Chinese goods to 20% and imposed 25% tariffs on all imports from Canada and Mexico, which will fully take effect by April 2. High tariffs on all steel and aluminum imports into the United States took effect on Wednesday, prompting retaliatory tariffs from Canada and the European Union. This will likely lead to higher prices for consumers, even if importers absorb some of these costs, according to analysts.

Consumer inflation expectations have risen, worrying Federal Reserve policymakers who believe that rising price expectations could easily translate into actual inflation.

At the same time, higher tariffs, retaliatory measures from U.S. trading partners, and uncertainty stemming from Trump’s erratic policies have slowed business activity, according to surveys, threatening to depress a labor market that has so far remained strong.

ING analysts believe that uncertainty over tariffs and the associated price increases could squeeze purchasing power, potentially further weakening consumer confidence and spending. It could also mean that uncertainty about the trade environment and the threat of reciprocal tariffs will weigh on business confidence, prompting companies to postpone investment and hiring until the outlook becomes clearer—which explains the growing talk of a possible recession.

Thursday’s wholesale price data is expected to help analysts determine the impact of the CPI on the personal consumption expenditures index—the Federal Reserve’s target of 2% annually.

Some analysts have suggested that the details of the CPI report may indicate that the PCE inflation rate may have accelerated in February.