Inflation, the Fed, Geopolitics: Ingredients for a More Volatile Autumn

International Trade: Between Fragile Truces and Persistent Tensions

A few agreements were reached this summer on tariffs (with the United Kingdom, the European Union, and Japan), although some remain incomplete (such as the ongoing discussions regarding taxes on pharmaceutical products). In addition, certain countries, such as India, have decided to retaliate. As for the U.S.–China discussions—undoubtedly the most complex and most significant given the size of the U.S. trade deficit with China—these continue following the extension of the truce between the two countries. Meanwhile, it is worth noting the solid performance of Chinese equities, which remain undervalued and benefit from hopes of government-led measures to boost consumer spending.

Inflation and Growth: The Federal Reserve’s Dilemma

Given this context, the key question economists are asking is: what will be the consequences of these tariff hikes on inflation and economic growth? The challenge here lies in estimating to what extent higher import prices will be passed on to the end consumer. While companies have so far managed to cut costs and thereby limit price increases, this may not last if they want to preserve their profit margins at current levels.

For now, the latest figures show that inflation in the United States rose to 2.7% in July. At the same time, economic growth is slowing, both in the U.S. and in Europe—a fairly logical outcome, as uncertainty does little to encourage corporate investment.

And so the question arises once again regarding U.S. interest rates and monetary policy: if these trends continue (higher inflation and weaker growth), will the Federal Reserve decide to cut rates in order to support growth? Up until now, its chairman Jerome Powell has remained cautious, resisting relentless pressure from Donald Trump. And last week, in his speech at the traditional Jackson Hole symposium, he once again summarized the complexity of the situation: “The risks to inflation are tilted to the upside, and the risks to employment to the downside.” But he emphasized the latter point, thereby opening the door to a possible rate cut—a genuine turning point. Markets now expect a rate cut as early as September. The question remains whether more will follow, and how investors will interpret such moves. In the meantime, this environment continues to weigh on the dollar, which has lost around 10% against other major currencies since the start of the year.