Fed Holds Rates, Signals Higher Prices are Coming Due to Tariffs

Published Jun 19, 2025, 1:40 AM

Senior US officials are preparing for the possibility of a strike on Iran in the coming days, according to people familiar with the matter, a sign that Washington is assembling the infrastructure to directly enter a conflict with Tehran.

Meantime, there are a lot of unknowns about the outlook for the economy and interest rates, but Federal Reserve Chair Jerome Powell signaled at least one thing seems certain: Higher prices are coming. Policymakers voted unanimously to hold interest rates steady for a fourth straight meeting Wednesday as they await clarity on whether tariffs will leave a one-time or more lasting mark on inflation. Powell said it’s still unclear how much of the bill will fall on the shoulders of consumers, but he expects to learn more about tariffs this summer. For more, we speak to Mark Cranfield, Bloomberg MLIV Strategist in Singapore.

Plus - for more on the Federal Reserve's latest decision, we heard from Betsey Stevenson. She is a Professor at the University of Michigan. Stevenson was also a former Chief Economist of the United States Department of Labor.

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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner, and we begin today with the geopolitics of the Mideast. We are being told that senior US officials are preparing for the possibility of a strike on Iran in the coming days. Now, this situation, important to say, is still evolving and it could change. Some of our sources pointed to the potential plans for a strike on the weekend. Joining me now is Mark Cranfield. He is Bloomberg Markets Live strategist and he joins from Singapore. Mark, thank you so much for making time to chat with me. I think we can agree these are indeed delicate times. There's the geopolitical situation between Israel and the Iran and the uncertainty of potential US involvement. The story on tariffs meantime is very much still alive. And then we've got the macro picture, which may be a little cloudy right now. But can we play off the FED decision in the last session here in the States, And I'm curious to get your take on how you see it impacting market psychology right now in the Asia Pacific.

The FED would be pretty happy with the result of what happened yesterday. They had an extremely difficult balancing act to do, as you say, in the context of all those things happening in the world, how do you create policy and guidance for people in the United States and to some extent globally, because everybody watches what the FED has to say, And they managed to do it without disrupting markets at all. By the end of the day, equity markets, bond markets, currencies are pretty much where they started the day. So from that point of view, patter on the back for the FED. But it's certainly their task is extra difficult because they clearly hinted at the fact that the United States is going to have a statulation every problem. They've lowered economic forecasts in their summary of economic projections, and at the same time they've upsized the project for inflation, particularly through the PCE window. So they're telling you that the in stackulation which is beginning to appear, is probably going to get worse in the United States. And yet they're working essentially one arm tied behind their back, because all investors can see that the difficulty for the FED is that should inflation pick up and become sticky in the sense that it stays for a bit longer. Is the FED going to really raise interest rates? Well, in the current environment and with your own power as a chairman, I think most investors would come to conclusion the FED is not going to typen policy. It's very much skewed the other way. Should the employment situation deteriorate and the America risk going somewhere towards the recession, of course they would act quickly and lower interest rates. The last thing they did was to lower interest rates, so they obviously have a slight bias towards doing that. But the real problem for them is what happens if inflation starts to get higher.

When you evaluate some of the risk that the markets are dealing with right now, and you look at the potential for haven buying, particularly in US treasuries or for that matter, in the US dollar, talk to me a little bit about the flow of funds that you have been seeing and how the dollar may be impacted right now.

We can take the dollar first, and I don't think there's much doubt that the US is losing its haven appeal. You can see that against major currencies it's had a pretty rough year this year, it's underperformed pretty badly. And then it's not just a one sided thing, because obviously there needs to be an appeal on the others. If you've got in currency trading, it's always one against something else. So it's all fine to say that the US dollar doesn't look as attractive as it did, but you need alternatives, and the alternatives are starting to look a bit better. So you take the Euro, which is the second biggest currency on the planet. Europe's getting exacted together, partly because it has to. It's under pressure to improve its defenses because of the situation in Russia and Ukraine and United States moving away from NATO, so they'reppy to spend more on the defense. That's creating a bigger poll of funds for the Euro. Investors can see that they're getting more comfortable that there's deep liquidity in the European market, so more money is starting to flow towards Europe. Then you've got China, which as just yesterday we had the Central Bank governor giving extended details about what they're doing to improve the dynamics in China for foreign investors, and that all revolves around stability and strength in the currency. They've made it very clear that China is right behind the Yuwan. They're not going to let it deteriorate. They're going to keep it stronger and stable. And that supports all other security aspects. It supports equities, it supports bonds, it supports all kinds of investment flows to China, and they're encouraging foreigners to send their money there. So you're beginning to have serious contenders to the US dot. It doesn't mean to say that the US dollar loses its status overnight, but you can see why money can now more happily move to other parts of the world because there are currencies which are standing up and being counted and saying, hey, we're a real alternative to the US dollar if you're uncertain about the outlook there. Treasuries is a much more complex picture, of course, because the Federal Reserve can twist the needle, they can lower interest rates quickly when they need to. But at the same time you do have these spreads between treasury yields and other countries, and that's where things will begin to show. If people start to lose faith in treasuries, you'll see where spreads will widen against Germany, against Japan, against other parts of the world. That's more like it's in the absolute direction of what treasuries may be doing, but certainly their share of the market holdings of fixed income investments could well go down in relation to other countries.

It's very interesting because we heard today from the US Treasury with respect to foreign holdings of US bonds and notes, and we learned that foreign holdings were actually up in the month of April to the second highest level on record. I found that a little surprising. So foreigners right now are holding a little bit more than nine trillion dollars in US government securities. Japan still the largest, Britain interestingly has increased its holdings. China's holdings were down a little bit. But when you look at the risk talking earlier about Haven's status, how much concern is there over the US fiscal situation right now, particularly the budget deficit, And I'm wondering whether that outlook for budget deficits going forward has become an important driver of the buying that we have seen on the part of foreigners in US treasuries.

Absolutely, investors clearly are a bit concerned that should the tax and spending be all go through in United States as it's currently planned, it's going to worsen what's already quite a bad fiscal deficit situation in United States. It's not going to get any easier. And then if you look at the way the data you're just talking about the holdings of UK number of people from the UK entities which are holding treasures. When that is going up, that is a warning signal because that tends to be hedge funds. That is not UK government or anybody UK sovereign well fund they don't even have one, but so it's not that kind of money. It's not secure money which is going to this is much more flaky short term money. So when the UK shows up as a bigger holder of treasure is that's not a good sign. That just means that short term holders who can quickly come in and out, and they're often doing it as spreads anywhere against other things, so they're not really secure holders of treasures. These are the people who can change on a dime. They'll be in and out in a matter of minutes. So that's actually a warning signal that the holders are less stable of US treasurers than they were earlier in the year. So all of these things, and of course we're on watch for the potential that we've had one sovereign downgrade already this year of the United States. These things tend to come in waves, and once the ball starts rolling in that direction, you could see more. Next stage will probably be to put the sovereign rating on an other outlook for potential vision lower. Investors are watching that very close. It could come before the end of the year. So all of these things are stacking up against the US Treasury. It's not looking as secure as it was.

I don't think it's a surprise at all that China reduced its holdings of US government securities. Talk to me a little bit about what's happening right now, insofar as you understand the progress that may be happening, or may not be happening, for that matter, when it comes to the trade issue between Washington and Beijing.

It looks from outsider in Asia, we probably see it a bit more slanted from the from the Chinese side, and it looks like they're playing the long game. It looks like the Chinese authorities are fairly happy with the way that they're stimulating their own economy. They're starting to rebuild things extremely well there. It's on a much better footing. Their markets are stable, currencies strong, They have some strong cards, as President Trump would say, particularly when it comes to some of the minerals they hold. So they look as though they're ready to take their time to get a trade deal. Dot really works from their point of view. They don't look as though they're going to panic and sign anything quickly at all. They want to do thorough negotiating and if it takes time, it causes a bit of pain. They're willing to play the long game in that respect. That might be in contrast to how the US authorities see it. So don't expect China to suddenly say, oh, yeah, we're happy we've got a deal straight away until they're really sure that it's something that is fair and favors them as much as it favors the United States.

I mentioned a moment ago the conflict between Israel and Iran. How is this being digested right now in the Asia Pacific.

It's all eyes on the oil on prices, as you can expect, everybody's watching that minute by minute to see what it means for changes in oil so far, we haven't got close to the one hundred dollars threshold. That's probably where people really start to get excited about the oil market. If it goes about one hundred, that starts to impact other asset classes lot more. And now we've reached about eighty dollars roughly on on Brent, which is not this high by recent standards, but it's not really out of the realms of what we've been seeing in the movements over the past year or so, so not extraordinary. It certainly was a quick movi in oil, but not yet one that really destabilizes financial markets on a brigger basis. So that's probably why you're seeing contained moves in currencies and bonds and equities as well. Get above one hundred dollars, things start to change quite rapidly.

You were talking a moment ago about the potential for hedge funds to become involved in trading of US bonds, particularly in the UK. Talk to me a little bit about what hedge funds do when they're trading oil and how that may be manifesting it right now, particularly given the environment that we're in right now.

We can already see in the options market in some very substantial changes in the demand in the options market. In fact, by some measures, what's going on in the current state of the option is actually more extreme than when Russia invaded Ukraine a few years ago. So that just shows you how suddenly people are positioning very quickly into that space. They will be trading spreads between contracts, so Oil's futures trading is very deep liquid market. People would trade the curve, whether it's steepens or flattens. They'll also be trading on the outright volatility in the market, which they do through the options market. So that turnover in that market has exploded in the past couple of weeks, and that's all geared towards the expectation that oil could spike higher again from here. So at the same time, the flip side of that, of course, is if things come down quickly, you could see oil retrace it very quickly, so we could go easily go back towards the mid sixties. In terms of price. If that premium some people gold Men Sacks are they saying that the premium is around ten dollars for the world premium priced into oil at the moment, I think Bloomberg they kind of miss save between five and ten, so something around that figure needs to be shaved off the oil price if you can. The situation calming down quickly so you could see quite a fast replacement. But for the moment, of course, people are not going to do that just yet because there's still a lot more to play out in that area. But they just shows you how quickly oil can reverse. Should Iran and Israel no longer be a major focus for the oil market, Mark.

Will leave it there. It's always a pleasure. Thank you so much for making time to chat with me. Mark Ranfield is a Bloomberg Markets Live strategist joining from Singapore. Here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. So Fed officials left their key policy rate unchanged in the last session, in a move that was pretty much widely expected. They continued at the same time to pencil in two rate cuts in twenty twenty five. The Fed also lowered its estimate for economic growth this year, while raising its forecast for both on employment and inflation. So this combination of weaker growth and stickier inflation suggests a more difficult economic backdrop. We got reaction from University of Michigan professor Betsy Stevenson. She spoke earlier with Bloomberg's Heidie Stroud Watson April Hong. First question, just how difficult is the Fed's position.

You can see what they're thinking exactly by looking at their projections, So you know, it is true that their forecasts for the US economy are getting worse over time. You know, in December they thought that the US economy would grow two point one percent this year. They revised that down to one point seven percent in March, and they revise that down again here in June to one point four. So it's like every you know, day, it gets a little bit there's a little bit more of a sense that, Okay, we're not going to have a strong year this year. And that was kind of ironic to listen to him say, like, there's less uncertainty, but that doesn't mean things are good.

We actually feel more.

Certainty that we're going to have tariffs that stick, that are higher than any kind of tariffs the United States has had in fifty or sixty years, So we're probably going to end up with some kind of effective tariff that is probably you know, five to ten times higher than what we had before Trump came into office. So I think our uncertainty is coming down, but it's because we're resigned to the fact that we're going to have higher tariffs and we're going to have lower growth.

So if you look.

At that range of forecasts, you did see their uncertainty come down, but it was actually because the people who were most optimistic have now sort of joined the rest of the pack and thinking that it's.

Going to be slower growth.

So you might say, then, why shouldn't they be cutting rates right now? Well, that's because that certainty about we're going to end up with higher tariffs and they're going to stick means that we do have inflation in front of us, and he's got to make sure that we we don't let that inflation take off. And here's another thing to consider, which is as inflation expectations have risen, effectively, they are cutting the real rate because keeping rates the same when people are expecting higher inflation is a rise at nominal rates and a cut in that real rate, So the market's cutting rates for them.

Yeah, that's a really key point.

Bets.

Yeah, I have to sort of you know not chuckle.

Obviously if there's a.

Lot of negativity out there, but you know, you make the point of is certainty when it comes to a more negative outlook really a good thing. But we've obviously seen the worries for the markets over energy markets and energy costs. Is it too early at this point to be able to look at the inflationary upside pressure from a potential change in those energy market dynamics.

Well, I got on this.

Pal was quite reassuring and reminded us that you know, if you go back to the nineteen seventies, a big oil price shock was terrible for the United States, but you know, the United States doesn't rely on on foreign oil as much. In fact, the US had achieved energy and dependence. Now, of course the market means that you know, prices should go up because we can sell anywhere in the world. We're not forced to sell to ourselves. So you know, and the whole you obviously care about more than the United States, The whole the whole world is going to suffer, you know, if with this geopolitical tension. So I think there are real global worries about that.

But I think what.

Pal said is those are not huge inflationary worries for the FED right now.

What about domestically, Betsy, When it comes to what you're seeing among the American public worries about consumer confidence job security.

Well, I mean, we do see that consumer confidence has down, CEO confidences down. People do have concerns about job security, and they're not just about tariffs. So we have Amazon coming out today and saying, you know, we're gonna need fewer people because we're going to outsource our jobs to AI, and so it's no longer going to be about, you know, competing with workers in foreign countries. It's going to be competing with artificial intelligence. So I think there is a lot of anxiety. And in fact, I would say this anxiety has been brewing for quite a long time and is one of the explanations for the tariffs that we have today, is that Americans have real anxiety about where the economy is going. I don't think the choice as President Trump is making has reassured them. In fact, I think that it's made it worse. But I do think it would be a mistake to think that that's the only thing weighing on American consumers and on American businesses.

What else is on consumer confidence and businesses, and you know, to what extent are you seeing perhaps full American industries as well the cost pass through, given how the DOLLA has also been depreciating.

Right, So, I mean this big set of questions, and I think consumers and businesses are in different places. So from consumers, I think that they think there's just a lot of uncertainty around what is going to happen in the workplace, right, are they going to have jobs? What we're seeing is a very weird labor market right now where unemployment is low, but it's not a good time to be unemployed.

It's not a good time to try to change jobs.

And that creates a little bit of anxiety and consumers.

You know, if you start to.

Fear that you could lose your job or that you could see your wages stagnate, you might start to pull back on your spending. And as you pull back on your spending, that makes out a self fulfilling prophecy. On the business side, I mean, they're trying to make decisions in a world that is highly uncertain. And that's about tariffs, It's about the geopolitical risk, and it's also about political risk. Right, we have a government right now that is very, very interventionist. I think a lot of American companies thought that the great.

Thing about President Trump was he was.

Going to let them just do their thing and that they were going to not have to deal with a really heavy regulatory environment.

But what they've learned is that it is still a pretty heavy environment.

It's just on a different set of issues and preferences coming out of government. So I think that uncertainty means everybody's moving a little bit slower, and when you slow the pace of movement, you slow economic growth.

See.

I think when he spoke with Boombo back in April, there was still this sort of discussion over whether it was a bigger growth risk or a bigger inflation risk, and whether we could kind.

Of see through the risk.

Do you think now that there's a real risk of stagflation for the US economy.

I mean, certainly every forecast has moved in the stagflationary direction.

And I think if you think.

About what can cause stagflation like we had stagflation in the seventies, stagflation really needs to come from some kind of supply shock that causes economic growth to shrink in a way that's sort of mismatched with where consumers are at.

So consumers want to keep buying stuff, so.

Prices are going up, but we're producing less. And that mismatch in the seventies that was caused by all the oil price shocks. What's happening in right now in the globe, and it's the same thing that caused the inflation in twenty twenty one twenty twenty two.

Coming out of the pandemic is supply chain problems.

So we're not able to move goods around the world, We're not able to count on trade, and that's shrinking are what we can could possibly produce, but that's not shrinking our desires, and so that is where we get that stagflationary pres you know pressure, And I think we've just got to wait and see sort of how that ends up playing out. You know, what's going to happen geo politically in all the domains, tariffs, war, et cetera.

That disconnect there. Great to get your insights, Betsy, Thank you so much. Betsy Stevenson, Professor of Public Policy and Economics at the University of Michigan.

Thanks for listening to today's episode of The Bloomberg Daybreak. Asia edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg