Why the Federal Reserve could shock the markets this summer: Economist

Listen and subscribe to Opening Bid on Apple Podcasts, Spotify, YouTube, or wherever you find your favorite podcasts.

If there is shock coming to markets, it could arrive this summer. And it could be in the form of a rate hike from the Federal Reserve.

Apollo Global Management chief economist Torsten Sløk says the US economy is already running at a healthy 3% Gross Domestic Product (GDP) growth pace, supported by high stock prices, investments in AI data centers by the likes of Microsoft (MSFT) and Amazon (AMZN) and strong defense spending. Layering on Trump tariffs would add fuel to the economic fire and drive up inflation, warns the veteran economist. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)

“So if with that backdrop we have policies that are now lifting inflation modestly from an already too high level, then my view would certainly be that then maybe we are not done with the Fed hiking rates. There is a risk that we could still have a rate hike later this year,” Sløk told me on Yahoo Finance’s Opening Bid podcast (see video above; listen below).

Sløk believes that should inflation accelerate as tariffs take hold, the first rate hike from the Fed could come at its mid-June meeting. More may follow, Sløk said, which could surprise a market that has settled into the view of the Fed standing pat on rates this year — if not lowering them further.

“If we have a significant increase in inflation because of a strong economy and potentially some policies that give a modest lift to inflation, then you could have several hikes later this year,” Sløk added.

The seeds for a renewed bout of inflation are being planted.

On Monday, President Trump signed two executive orders imposing new 25% tariffs on steel and aluminum.

Last Tuesday, the president imposed a 10% tariff on all Chinese imports on top of existing tariffs on the country. China retaliated, placing tariffs on select chips and metals. It also began investigating Google (GOOG) and blacklisted US apparel brands Calvin Klein and Tommy Hilfiger, operated by PVH Corp. (PVH).

Trump recently agreed to pause 25% tariffs on Canada and Mexico for 30 days.

Estimates on the impact of tariffs on inflation vary, but economists agree there will be some consequences.

A new report from Deutsche Bank economists projects the steel and aluminum tariffs alone could boost the core personal expenditures price index (PCE) — a key read on inflation — by 0.4%.

Should the tariffs on Mexico and Canada go through, inflation could rise more than 3.5%, Deutsche Bank said. On this front, Goldman Sachs economists estimated “long-term” 25% tariffs on Canada and Mexico imports could lift the PCE by 0.7% and hurt GDP by 0.4%.

Story Continues

Sløk said the market hasn’t priced in the prospect of rate hikes yet.

The markets would be forced to adjust their profit estimates lower, explained Goldman Sachs chief US strategist David Kostin.

If the US implements sustained tariffs on exports consistent with those currently outlined, it would likely cut earnings per share for the S&P 500 by 2% to 3%, Kostin found.

“If company managements decide to absorb the higher input costs, then profit margins would be squeezed. If companies pass along the higher costs to end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices,” Kostin said.

—

Three times each week, I field insight-filled conversations and chats with the biggest names in business and markets on Opening Bid. You can find more episodes on our video hub or watch on your preferred streaming service.

Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

This article was originally published by a finance.yahoo.com . Read the Original article here. .