Many analysts have elongated the pause in policy easing expected from the Federal Reserve (FED). Their original assumption that the Fed would start to cut rates again in the summer has been jettisoned in favor of a call for rates to remain on hold for the bulk of the year. There might even be doubts that rates can be cut again, but, at the moment, we do not share these.

FED Chair Powell testified to the Senate Banking Committee on the Monetary Policy Report that the Fed released on Friday. Ordinarily, we might expect such testimonies to shine a light on how Fed policy will evolve going forward. But that won’t happen this time … and it won’t be Powell’s fault. With the new administration’s policies so uncertain and so likely to change (as we’ve already seen with the temporary rescinding of tariffs on Canada and Mexico), the Fed can’t really be expected to plot a clear way forward. Policy is still regarded by the Fed as restrictive and hence the path of least resistance should be towards rate cuts, but keeping policy where it is for a time seems to make more sense. The problem is that the magnitude of the impact from rumoured policy changes might be so large that it would be injudicious of the Fed to take any action until the policy landscape is clearer.

Take tariffs, for instance. While the Fed will have done its own research on this, it has not been discussed publicly and the Fed’s Monetary Policy Report itself made very little mention of the issue. Thankfully, others have stepped in. The Federal Reserve Bank of Boston, for instance, has calculated that 25% tariffs on Mexico and Canada, plus 10% on China will add 0.8% points to core PCE prices. If Trump were to go the whole hog, with 60% tariffs on China and a 10% global tariff, the cost to core PCE price inflation would then be a whopping 2.2% points.

Now, of course, this is one estimate amongst many. But even if others differ slightly it is crystal clear that the Fed cannot afford to ignore such risks when it sets policy. An added problem is that the Fed won’t know whether the imposition of any such tariffs will be long-lasting or just a very short-sharp rap on the knuckles for those deemed to be treating the US “very unfairly” to use Trump’s words.

In short, it leaves the Fed in an almost impossible position and, if the Fed finds itself in such a predicament, so too does the bond market. It seems that the best thing the Fed can do is wait it out to see if tariffs, and other policies, such as tax cuts, materialise in full. In the meantime, the Fed can still react if the economy moves off course even before policies change.

For instance, the tariff threat already seems to have spooked inflation expectations judging by the historically large one percentage point jump in one-year inflation expectations in the early February Michigan consumer confidence survey. Of course, the Fed will want to see plenty more evidence of rising inflation expectations before considering action. It will also want to be sure that tariff uncertainty does not lead to a fracturing of business and consumer expectations about growth; as that could push the Fed to cut policy rates more quickly.

The Standard Bank’s assumptions about tariffs, taxes, growth and inflation are that tariffs will be levied against certain countries and industries, but not on a global basis, which is the same view that it took from before the election. Such action, plus tax rewrites that make the 2017 personal tax cuts permanent, should ensure that inflation remains above the 2% target. However, it is not of the view that inflation rises so materially that it makes the next move in policy rates a hike rather than a cut. Instead, we are just likely to have to wait a while longer before the Fed can ease again.

“We also think that future rate cuts will be worth a more miserly 50-bps compared to previous forecasts, leaving the policy rate some 100-bps above the ‘neutral’ rate of 3% that forms the median call of FOMC members”, said the Standard Bank.