Tariff-Driven Inflation Could Be Gradual: Why September Rate Cuts Remain Viable

Market-based inflation expectation indicators are emerging as a critical variable in shaping the Federal Reserve’s near-term policy direction. According to recent analysis from Annex Wealth Management’s Chief Economist Brian Jacobsen, the trajectory of core inflation suggests that tariff-related price pressures may unfold gradually over an extended period, rather than spike immediately.

This measured outlook has important implications for Fed decision-making. As long as key metrics—particularly the breakeven inflation rate and other market-based inflation expectations—remain within manageable ranges, policymakers should find sufficient justification to resume rate reduction efforts beginning in September.

The central challenge ahead lies in the increased uncertainty surrounding inflation dynamics. Over the coming months, both Federal Reserve officials and economic analysts will likely grapple with conflicting signals. Traditional inflation measures may not paint a complete picture, especially when tariff-related costs are unevenly distributed across the economy.

However, Jacobsen’s framework emphasizes that the Fed needn’t await perfect clarity. By monitoring the breakeven inflation rate—a crucial proxy for long-term inflation expectations embedded in financial markets—policymakers can gauge whether inflation fears are genuinely taking hold or remain contained. A stable breakeven inflation rate would signal that markets aren’t pricing in runaway inflation, providing the Fed with the confidence needed to shift toward accommodative policy.

This suggests that September could indeed mark a turning point, contingent on inflation expectation indicators remaining anchored. The data will ultimately determine whether the Fed proceeds with cuts or holds its ground.