The Fed may treat the current lower US core inflation as transitory

·       Wall Street wobbled, while USD, Gold, and Oil spiked amid Israel-Iran escalating conflict; Fed may not cut before September’25 despite Trump pressure

·       The fine print of inflation and import data indicates US core CPI inflation may scale 3.5-4.0% by Dec’25; the Fed will also treat any higher tariff inflation as transitory

·       Trump is now pressuring the Fed for immediate rate cuts of 100-200 bps, but Fed/Chair Powell may not cut above 50 bps

Since January 2025, Trump 2.0, the US, and the global financial market have been almost fully controlled by Trump’s morning moods, Truths, random comments, and whims and fancies, rather than economic data and Fed comments. Market participants remain focused on escalating trade war tensions under President Trump and their potential impact on both Wall Street and Main Street. But recently, Wall Street is again focusing on inflation data to understand the effect of Trump tariffs narrative and Trump’s increasing pressure on Fed Chair Powell to cut rates by as much as 100 bps ‘immediately’ to protect the economy from any Trumpcession and also to lower borrowing costs of the Government.

On Wednesday (June 11, 2025), apart from the ongoing Trump tantrum, some focus of the market was also on U.S. inflation data for May as it was the 1st month after Trump announced his April 2 ‘Liberation Day’ reciprocal tariffs from 20% to 75%, but eventually paused it on April 9 for 90 days till July 9. Also, the market was watching for any effect of Trump’s draconian imposition of 10% additional tariffs on Chinese goods in early February on the headline inflation number. The US CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, such as food, transportation, and shelter. Core CPI excludes the volatile food and energy categories to provide a clearer view of underlying inflation trends.

On Wednesday, the BLS data (NSA) showed the annual (y/y) US core CPI inflation was unchanged at 2.8% in May against 2.8% sequentially and below the median market expectations of 2.9%. The US core CPI inflation was unchanged at 2.8% for the last three months since March 2025, after the 1st month of Trump 2.0 at 3.1% and Biden’s last month of January 2025 at 3.3% against pre-COVID January 2020 of 2.3%, the real Fed target for core CPI inflation.

US CORE CPI INFLATION (Y/Y)

The 3MRA (three-month rolling average) of US core CPI was 2.8% in May’25, against 3.6% yearly (y/y) and still slightly above December’19 pre-COVID 3MRA of 2.3% and the Fed’s price stability targets for core CPI levels of 2.3%; i.e. Fed needs to bring down core CPI inflation to the least 2.3% on a sustainable basis from present average of 2.8% to achieve its price stability targets.

Overall, the average US core CPI was at 2.9% in 2025 (YTM), 3.4% in 2024, against 4.8% in 2023, 6.2% in 2022, and 2.0% in 2019. The US core CPI has increased 22.3% cumulatively from January’19 to May’25.

On Wednesday, the BLS data (SA) also shows the sequential (m/m) US core CPI rose 0.1% in May’25 from 0.2% in the preceding month and below the market expectations of 0.3%. Overall, the 2025 average (YTM) 2024 average was 0.3% against 0.3% in 2023, 0.5% in 2022, and 0.1% in 2019 (pre-COVID).

US CORE CPI INFLATION (M/M)

In February’25, the BLS data shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars & trucks) rose at 1.9% from 1.8% in the prior two months compared to 1.7% in pre-COVID (January’20) times.

US SUPER CORE CPI

On Wednesday, the BLS data (NSA) also showed the annual (y/y) US total CPI inflation edged up by 2.4% in May’25 from 2.3% sequentially, below the median forecasts of 2.5%. The US food inflation edged up by 2.9% from 2.6% sequentially, while energy inflation fell by -3.5%% % against -3.7% sequentially. The US food inflation was around +1.8% in December’19 pre-COVID days, while energy inflation was around +3.4%, and total CPI (headline inflation) was +2.3%, at the Fed’s target and equivalent to total PCE inflation +1.5%.

Overall, the 3MRA of US CPI inflation was 2.4% in May’25. The 2024-average US CPI was 3.0% against a yearly average of 4.1% in 2023 and 2.3% in 2019 (pre-COVID); officially, the US Congress has given the Fed a price stability mandate of 2.0% CPI inflation on a sustainable basis; not core CPI or core PCE and even total PCE inflation.

Overall, till May’25, the US total CPI was around 23.8% higher than pre-COVID Jan’19 levels (5.5 years); i.e., around 4.3% on average against an average of 2.3%

On Wednesday, the BLS data (SA) showed the sequential (m/m) US CPI edged up to 0.1% in May’25 from 0.2% in the prior month, below median market expectations of +0.2%.

US TOTAL CPI (M/M)

The 3MRA of sequential CPI was 0.1% in May’25.

Why US core CPI inflation is low despite some Trump tariffs being effective from April’25

The muted effect of higher import duties on inflation through May 2025 stems from time lags in price transmission, tariff exemptions, and rollbacks, declining import volumes, cost absorption by businesses, consumer substitution, and the structure of inflation metrics. While tariffs raised costs for specific goods (e.g., clothing, autos), these effects were diluted in broader CPI data and likely emerged more prominently after May 2025 as pass-through increased and exemptions expired. Also, import data is showing front loading from November’24 to March’25 to beat Trump tariffs ahead of Trump’s April 2 Liberation Day reciprocal tariffs announcement.

Overall, Trump tariffs are now showing up in the US inflation data due to:

·       Front-loading of imports in anticipation of higher Trump tariffs

·       Lack of adequate pricing power by US importers/producers

·       Likely discount by exporters to some extent to retain market share

·       Fed is assuming 15.5% weighted average Trump tariffs as a base case for the longer run, which may be equally borne by US importers, consumers, and also exporters at around 1/3rd each.

·       There would also be factors of cross-currency devaluation, like lower CNY against USD to some extent, adjusting higher import and lower export prices on both sides.

·       Under this base case, Trump’s tariff may boost headline CPI inflation to around 3.5-4.0% as a one-time effect (transitory)

·       US import inflation was lower in the last year; the US import price index was 141.5 in May’24 against 141.8 in April’25; i.e. 0.21% increase in 12 months, which is 0.02% average increase per month; i.e. almost zero imported inflation and resulted into similar inflation for US goods; US imports almost 50% of its merchandise goods requirement and out of that 15% imported from China directly and another 35-50% indirectly through so-called Chinese proxies (transshipments) through Mexico, Canada, EU and Vietnam mainly (as per US allegation)

US IMPORT INFLATION (y/y)

US GOODS INFLATION (Y/Y)

Overall deflationary trend and stable employment are providing the Federal Reserve (Fed) with room to maintain current interest rates as it assesses the economic impact of Trump’s uncertain policies on trade, tariffs, techs, immigration, deportations, deregulation, tax cuts and other potential fiscal issues including the planned hand out of $1000 each to a new baby... However, the narratives of new tariffs by the Trump administration have raised concerns about potential future inflationary pressures in the H2CY25 data. As of May’25, Trump imposed 15.5% average tariffs, the impact of which may be visible on US consumers and also producers in H2CY25 onwards (as base case scenario).

The Trump administration is pressuring Fed Chair Powell for an immediate rate cut to the tune of 100 bps.

Following the subdued May 2025 inflation data (CPI at 2.3% annually, 0.1% month-over-month; core CPI at 2.8%), President Trump and Vice President Vance intensified their criticism of Federal Reserve Chair Powell for not cutting key interest rates, which remained at 4.25%–4.50%.

Trump’s Recent Comments (insults) against Fed Chair Powell

·       CPI JUST OUT. GREAT NUMBERS! FED SHOULD LOWER ONE FULL POINT. WOULD PAY MUCH LESS INTEREST ON DEBT COMING DUE. SO IMPORTANT!!!

·       Prices are down, income is up, our Border is closed, gasoline is CHEAP, inflation is DEAD — Our Country is BOOMING! Companies are pouring into America like never before!

·       “Too Late” at the Fed is a disaster! Europe has had 10 rate cuts; we have had none. Despite him, our Country is doing great. Go for a full point, Rocket Fuel!

·       If “Too Late” at the Fed would CUT, we would greatly reduce interest rates, long and short, on debt that is coming due. Biden went mostly short-term. There is virtually no inflation (anymore), but if it should come back, RAISE “RATE” TO COUNTER. Very Simple!!! He is costing our Country a fortune. Borrowing costs should be MUCH LOWER!!!

·       GREAT JOB NUMBERS, STOCK MARKET UP BIG! AT THE SAME TIME, BILLIONS POURING IN FROM TARIFFS!!! (After upbeat May NFP/BLS private payroll data)

·       ADP NUMBER OUT!!! “Too Late” Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES! (After terrible May ADP private payroll job data)

·       Trump called Powell a “numbskull” and demanded a two-percentage-point rate cut, claiming it would save the U.S. $600 billion annually. He suggested he “may have to force something” if Powell did not act, emphasizing low inflation and declining costs for oil, energy, and groceries.

·       We’re going to spend $600 billion a year, $600 billion because of one numbskull that sits here [and says] ‘I don’t see enough reason to cut the rates now”--- but we can’t get this guy to do it---

·       I am okay with the Fed raising rates if inflation is going up--- But it’s down--- and I may have to force something.

·       It would be great, but he doesn’t want to do it. I think he doesn’t want to do it--Probably he’s not in love with me. I think that’s right, it’s sort of a crazy reason, but that’s the way life is

·       During a meeting with Powell, Trump privately told him it was a “mistake” not to cut rates, reiterating his public stance.

·       White House Press Secretary Karoline Leavitt confirmed Trump did not discuss removing Powell, whose term runs through May 2026

Overall, Trump has consistently criticized Powell throughout the first few months of his 2nd term, like in the 1st term, previously calling him a “major loser” (April 21) and threatening to fire him (later retracted in April after market backlash). He argues that low inflation and a moderating labor market justify immediate rate cuts to boost growth.

The US Commerce Secretary, Howard Lutnick, said Wednesday, June 11:

·       It’s unbelievable how much we would save if [Powell] did his job and cut interest rates

·       The economy is ready for it. It’s easy. Inflation is low--Come on. He’s got to do his job soon

US VP Vance’s Comments Against Fed Chair Powell

·       June 11, 2025 Tweets: Vance echoed Trump, stating, “The president has been saying this for a while, but it’s even more clear: the refusal by the Fed to cut rates is monetary malpractice.” He cited the May CPI (2.4% annually, 0.1% month-over-month) as evidence that inflation was under control, aligning with Trump’s call for a rate cut.

·       May 9, 2025 (Fox News Interview): Vance doubled down, saying Powell “has been wrong about almost everything.” He criticized Powell for being “way too late” in addressing Biden-era inflation and now failing to cut rates to counter “ridiculous trade deals” that he claimed harmed American wealth. Vance defended Trump’s tariff policies, arguing that rate cuts would support economic self-reliance.

·       “I think the president is right about Jerome Powell---He’s a nice guy, but he’s been wrong about almost everything. He was way too late in combating the [Joe] Biden inflation, and now I think he’s way too late in actually helping us fight back against some of these ridiculous trade deals that have stolen the wealth of the American people.

Overall, Vance’s remarks reinforce Trump’s narrative, framing Powell’s inaction as detrimental to economic growth, especially amid tariff-driven uncertainties. His “monetary malpractice” comment reflects a broader administration push to pressure the Fed in an attempt to cut rates early.

The May 2025 inflation data shows limited tariff pass-through due to exemptions (e.g., smartphones, USMCA goods), stockpiling, and retailer cost absorption. Declines in vehicle and energy prices further resulted in subdued inflation. Powell/Fed maintained rates at 4.25%–4.50% in May, citing uncertainty over tariff impacts and risks of higher inflation or unemployment. He emphasized the Fed’s independence and data-driven approach, noting that tariff effects could be “short-lived” or “more persistent.” Markets expect no cut in June but a possible 25-basis-point cut in September.

Trump, Vance, and other top admin officials argue that very low inflation soft/vulnerable labor market, and subdued economic growth justify rate cuts to stimulate growth. Trump’s claim of $600 billion in savings from a 2% rate cut is just an imagination, not based on evidence; it depends on bond yields and overall economic and rate cut trajectory. Their rhetoric aims to influence the Fed, despite Powell’s insistence on independence. Politicians generally always seek lower borrowing costs to fund political capital, i.e., vote bank, and also note bank.

Conclusions

Fed may not cut before September 2025 despite Trump pressure, but may close UST QT in June’25

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, US Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate.

In June’25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. The Fed is now cutting rates while doing QT, which is two contra-monetary policy tools. As a result, bond yields remain elevated at around 4.50%, and the real economy may not be getting the full effect of a 100 bps rate cut in 2024. The market usually discounts Fed rate cuts well in advance, in line with regular Fed talks and official dot plots. Fed is now doing QT for UST at the official rate of around $5T/M, which is itself a negligible amount, compared to the Fed’s balance sheet.

Fed may not cut in June-July 2025 amid lingering Trump tariff uncertainty, but may act in September’25 and December’25 depending upon Trump’s implemented tariffs and overall US economic situation. Fed may maintain wait & watch stance till August’2025, as by then Trump’s tariff policies may take a potential clear shape of a 10% basic/universal rate with some sectoral tariffs ranging from 25% to 50%. Even if Trump makes a final decision of a 10% ‘smaller’ tariff, including that on China, by early July-August (along with sectoral tariffs), the Fed needs time to evaluate the weighted average cost of tariffs on the economy and thus may act only from September 2025.

Trump may also extend his reciprocal tariffs pause from July-August to December’25 to ensure no supply shock for the US economy. Trump may continue his chaotic tariff policy to get a fair trade deal for the US. If Trump goes on with his higher reciprocal tariffs, it would cause a supply shock and a higher cost of living for ordinary Americans, most of whom live on a pay check to paycheck-to-paycheck basis. Further, such tariffs would cause a demand shock in the future and an all-out recession. This will also cause a loss of Vote Bank (ordinary Americans) and Note Bank (political funding by corporate America) for Trump and Republicans. Thus, Trump is bound to blink and may take a less hawkish tariff position in the coming days.

Summary

Fed may exit QT for $5T UST; MBS QT will continue; Fed may replace MBS depletion with UST in the future in a systematic way; this may help bond prices to go higher and yields lower to pacify Trump & Co. Fed may also indicate rate cuts from September 2025 citing both lower inflation and also any higher tariff-related inflation in future as transient. Lower inflation is currently a function of the favorable base effect (higher base) and front-loading of imported goods to avoid higher Trump tariffs. But 15.5% weighted average Trump tariffs effective from Q2CY25 may boost US inflation from Q2/Q3CY25 onwards.

The Trump admin also knows this fact and thus is now pressuring the Fed to go for a crisis-era rate cut of 100-200 bps at a time or within a short span. By pressuring the Fed, US President Trump is complicating the Fed’s job more and also hurting the future credibility of the Fed as an independent institution. This may hurt the USD's credibility as a global reserve currency in the future, and the US may be losing the advantage of its greatest weapon, the USD hegemony, which it uses for geopolitical influence and becoming the number one superpower in the world.

Market impact

Wall Street edged up Thursday, June 12, on an oracle boost and renewed hopes of Powell and Trump put

US stock markets edged up on Thursday, on an Oracle boost and renewed hopes of a Fed pivot amid no signs of Trumpflation. The market is now slowly assuming the Fed may start cutting rates from September’25 and may also cut 75-100 bps till December’25, but the Fed may not cut more than 50 bps in late 2025. The S&P 500 surged 0.4% and the Nasdaq-100 edged up 0.2%, lifted by a 13% surge in Oracle amid an upbeat report card, including a resilient forecast for cloud growth driven by AI demand. The Dow closed 101 points higher, despite Boeing tumbling following a deadly crash involving an Air India Dreamliner, causing at least 300 total deaths, including 241 on board. Boeing has lingering issues of quality in almost all its civilian jets, including the 737 MAX and also 787 Dreamliner.

Late Thursday, Wall Street Futures also stumbled after Trump vowed to hike auto tariffs...Also, Trump's trade & tariff war uncertainty with China and other countries, coupled with growing Iran-Israel tensions, dragged Wall Street.

But Trump Warns of Higher Auto Tariffs to Spur U.S. Investment

On Thursday, in an event, U.S. President Trump indicated a possible hike in auto tariffs, saying it could push automakers to invest more in the U.S.:

·       I might go up with that tariff in the not-too-distant future

·       The higher you go, the more likely it is they build a plant here.”

Automakers, including the Detroit Three, have urged the White House to ease the current 25% tariffs, especially after a deal cutting tariffs on British car imports excluded Canada and Mexico (USMCA). Trump pointed to recent investment pledges, such as GM’s $4 billion plan to upgrade three U.S. plants and shift SUV production from Mexico, and Hyundai’s $21 billion U.S. investment, including a steel plant.

·       They wouldn’t have invested 10 cents if we didn’t have tariffs

Trump credited his extortionist tariff policy for a resurgence in American steel. Meanwhile, Mexico faces an average 15% tariff on U.S.-bound cars due to content-based reductions. Higher tariffs could force more production to the U.S. but risk escalating costs and trade tensions.

Wall Street Futures slid early Friday (June 13) amid escalating Israel-Iran confrontations.

US stock market futures fell sharply on June 13, 2025, following Israel's preemptive airstrikes on Iran's nuclear and military facilities, and Iran’s drone retaliation attempt, escalating regional (Middle East) tensions. The US-assisted Israeli strikes, aimed at preventing Iran from developing nuclear weapons, basically aimed at forcing Iran to take Trump’s nuclear deal Sunday (June 15) or risk further devastation. The escalating geopolitical tensions triggered a surge in oil prices, with WTI crude rising nearly 9% to above $74 per barrel and Brent crude spiking over 12%. This heightened fears of potential disruptions to global oil supplies, contributing to a risk-off mood in markets; Gold jumped on escalating geopolitical tensions; USD also surged, along with other haven assets during wartime.

Energy stocks like Chevron and Exxon gained nearly 3% in premarket trading, while defense stocks, including Lockheed Martin (up 4.7%) and RTX Corporation (up 6%), also rose. Conversely, airline stocks such as Delta Air Lines and United Airlines fell 3.9% and 4.8%, respectively, reflecting concerns over higher fuel costs and geopolitical risks. The escalation in the Middle East, combined with ongoing trade policy uncertainty, has increased market volatility. But ‘Deal & Peace Maker’ Trump may be trying to seal a nuclear deal with Iran by Sunday's meeting, using an all-out war by Israel against Iran as a negotiating tool.

Trump posted on his Truth handle on late June 12, just minutes after Israel launched the Iran attack:

“I gave Iran chance after chance to make a deal. I told them, in the strongest of words, to “just do it,” but no matter how hard they tried, no matter how close they got, they just couldn’t get it done. I told them it would be much worse than anything they knew, anticipated, or were told, that the United States makes the best and most lethal military equipment anywhere in the World, BY FAR, and that Israel has a lot of it, with much more to come - And they know how to use it. Certain Iranian hardliners spoke bravely, but they didn’t know what was about to happen. They are all DEAD now, and it will only get worse! There has already been great death and destruction, but there is still time to make this slaughter, with the next already planned attacks being even more brutal, come to an end. Iran must make a deal before there is nothing left, and save what was once known as the Iranian Empire. No more death, no more destruction, JUST DO IT, BEFORE IT IS TOO LATE. God Bless You All!”

Technical outlook: DJ-30, NQ-100, Gold and Silver

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42600) now has to sustain over 42900 for a further rally towards 43200/43600*-44000/45300 in the coming days; otherwise sustaining below 42800, DJ-30 may again fall to 41900/41700-41400/41000* and further 40600/40100-39200/38000 in the coming days.

Similarly, NQ-100 Future (21600) has to sustain over 22000 for a further rally to 22400/22500-22700/23000 in the coming days; otherwise, sustaining below 21900, NQ-100 may again fall to 21900/20900-20700/20200 and 19890/18300-17400/16400in the coming days.

Technically Gold (CMP: 3350) has to sustain over 3375-3395 for a further rally to 3405/3425*-3450/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3365, Gold may again fall to 3340/3320-3300/3280 and 3255/3225-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.

Also, technically, Silver (CMP: 36.50) has to sustain over 38.00 for a further rally to 40.00/45.00-49.00/50.00 in the coming days; otherwise, sustaining below 37.00, Silver may again fall to 36.00/34.50-32.00/31.50 and 31.00-30.50 in the coming days.

Also, technically, Silver (CMP: 36.50) has to sustain over 38.00 for a further rally to 40.00/45.00-49.00/50.00 in the coming days; otherwise, sustaining below 37.00, Silver may again fall to 36.00/34.50-32.00/31.50 and 31.00-30.50 in the coming days.