Former US Fed Vice Chairman: The FED's fight against inflation is not over yet, and this week's meeting will focus on expectations for an interest rate cut!

Richard Clarida, former Vice Chairman of the US Fed, recently warned that the Fed's battle against inflation may not be over yet. He pointed out that although inflation has gradually approached the Fed's 2% target, US President Trump's tariff policies could still exert upward pressure on prices in the coming months.

"What we know is that inflation data has been better than expected since January. April and May have been overshadowed by tariffs, but the rise in costs has not yet been reflected in the inflation data," Clarida said.

This is evident from the Fed's preferred inflation indicator, the PCE price index. The US PCE price index rose 2.1% YoY in April, a further decline from March's figure (2.3%) and matching the lowest level since the pandemic.

However, Clarida noted that these favorable data may mask the delayed effects of "early stockpiling" by US enterprises in Q1. Data from the Yale Budget Lab showed that the average effective tariff faced by consumers in June was estimated at 15.6%, the highest level since 1937.

"As we continue to receive data, we still expect tariffs to push up inflation indicators for some time. Compared to 'Liberation Day', these peak tariffs look lower than many people imagined. But we do expect inflation to pick up again," Clarida said.

He added that inflation could rise to around 3%.

He served as Vice Chairman of the Fed from 2018 to 2022 and is now the global economic advisor for bond giant Pacific Investment Management Company (Pimco), which manages approximately $2.03 trillion in assets.

This week's FOMC meeting

This week, investors are undoubtedly most focused on the Fed's FOMC meeting. Before the meeting, President Trump has been pressuring Fed Chairman Powell to cut interest rates, even threatening to fire him.

Although interest rates are expected to remain unchanged after the meeting concludes on Wednesday, the Fed will provide an updated Summary of Economic Projections, including the dot plot that will reflect how many rate cuts committee members expect this year. The last time the Fed released economic projections was in March, before the globally shocking "Liberation Day tariffs" were announced.

Clarida emphasized that in this context, the real question will be whether the FOMC still expects to cut interest rates twice this year or will lower its expectations to just one rate cut.

According to the CME FedWatch Tool, the market still expects two interest rate cuts this year. If this happens, the policy interest rate will fall within the range of 3.75% to 4% after the US Fed's December policy meeting.

Although Pacific Investment Management Company (PIMCO) believes in its new five-year outlook that Trump's second term represents a new era of politically driven economics, Clarida stated that, as his base case, he does not believe the independence of the US Fed in setting interest rates will be threatened.

"We may enter a world where the Fed loses some power in a regulatory sense. But it appears that the Fed retains its independence to raise or lower interest rates," he said.

Clarida mentioned a recent Supreme Court ruling. Just last month, the US Supreme Court strongly indicated that members of the US Fed's Board of Governors would be afforded special protection from being dismissed by the President. However, the ruling allows President Trump to dismiss two board members from other federal agencies. The US Supreme Court emphasized that the US Fed is unique among government agencies.

Clarida pointed out that this ruling leads him to expect that the Supreme Court will ultimately grant the US Fed an exception, or a "safe harbor," on this issue.

He also said that any new Fed Chairman would likely face intense scrutiny from the Senate and financial markets.

"I think the market should have a say. If a Fed candidate is perceived as not being independent or not committed to reducing inflation, it is foreseeable that there will be significant negative reactions in the stock and bond markets. These are two reasons for the Fed to maintain its independence," he said.