Treasurys: From Yellow to Red?

Rising Yields As Week Ended Are Not a Surprise

The Federal Reserve faces a defining moment at the Federal Open Market Committee meeting next Tuesday and Wednesday. With the May figures for both the Consumer Price Index and the Producer Price Index coming in tame, the consensus view has been that the Fed can afford to wait — to let more data accumulate before taking any action. As SriKonomics has repeatedly stressed, that would be a mistake.

Fresh military conflict between Israel and Iran that began Thursday has already had a major impact on oil prices. Analysts and policy makers who have been sanguine on the inflation front despite the imposition of the Trump tariffs are facing a yellow light on the prospects for inflation and long-dated Treasury yields.

The key question, even at the start of the week, was not whether the inflation numbers to be released Wednesday and Thursday were going to be benign. Producers and retailers not wanting to pass on the price increases yet, and the lag between the imposition of tariffs and their impact on prices, suggested a delayed impact. Under these circumstances, the Federal Reserve’s key role ought to be to judge whether the economy is on a sustainable path for price stability, and to ensure that it changes its policy if there is a deviation from that path.

First, as I suggested above, the inflationary effects of the Trump administration’s recently imposed tariffs have not yet been felt. The impact will begin to register only in the second half of 2025 and during 2026. Just as important, President Donald Trump has publicly stated that he plans to propose additional unilateral tariffs within the next two weeks. These measures are unlikely to be received well by U.S. trading partners and risk reigniting trade tensions that had been dormant. The result will not only be upward pressure on import prices, but also increased volatility in global markets.

Second, the U.S. dollar has weakened materially since the start of the year. Measured by the DXY index, the dollar is now at its lowest level since March 2022 with no indication that it has hit bottom. Where did the currency depreciation come from? Uncertainty on the trade front — erstwhile trade partners who suddenly came to be called cheaters on policy— was a major factor. Even the new conflict in the Middle East did not lead to a significant appreciation in the dollar as a safe haven. Instead, the price of gold, the ultimate refuge from risk, rose by another 1.5% yesterday from already lofty levels.

Although the U.S. is a relatively closed economy — imports account for only about 14% of GDP — depreciation of the currency still raises the cost of imported goods and commodities, reinforcing inflationary pressures. When a weaker dollar is layered on top of new tariffs, the risk of cost-push inflation rises meaningfully.

Hikes in levies followed by temporary pauses made it risky for importers and manufacturers to follow the President’s initial dictates — the policy could change in a matter of minutes. Such shifts in policy worsen supply bottlenecks. Imagine Apple’s predicament when it wanted to change sourcing of electronic parts for the iPhone to India to avoid the Trump tariffs on China, only to have the President threaten tariffs on Apple’s imports from India as well.

Markets, for now, are celebrating what they perceive as benign inflation data and the possibility of Fed rate cuts. That celebration is premature. Investors are underestimating both the inflationary consequences of trade actions and the political uncertainty embedded in U.S. economic policy. If the Fed chooses to wait until these effects are fully visible in the data, it will be behind the curve as it was in 2020 - 2021.

Domestic demand remains robust and wages are growing faster than productivity. Financial conditions remain accommodative. Asset prices — from equities to housing — continue to reflect a risk-on environment. These are not signs of an economy needing easier monetary policy. They are signs of an economy running the risk of overheating — especially when combined with the potential for renewed cost shocks through trade and currency channels.

President Trump’s pressure campaign against any further rate hikes is loud and unambiguous. Instead, he wants the Fed to ease policy, lowering the Federal Funds rate by a full percentage point. But the Fed’s responsibility is not to the White House or to Wall Street, but to the American public and to its mandate. Monetary policy must be forward-looking. A reactive Fed is a weak Fed — and a weak Fed ultimately loses its ability to anchor expectations.

The cost of inaction is rising. If the Fed delays now, it may be forced to tighten more aggressively later. By contrast, a modest 25 basis-point rate hike next week would send a critical signal: that the central bank sees through temporary data noise, is focused on the broader inflation trajectory, and will not allow political posturing to dictate economic policy.

Waiting would be a concession to complacency. Acting now is a commitment to stability.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

www.srikumarglobal.com

@SriKGlobal

June 14, 2025

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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