Bloomberg Surveillance TV: July 1st, 2025
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. It's

Here's the view on Wall Street this morning. Julian Emanuel of Evercore saying it's not yet the time to pile in. Writing the following, a pullback is our base case given the parabolic move already and the risks from tariffs and policy to the economy. Julian joins us now for more. Julian, good morning. Good morning. Shall we take a beat? How's it feel, the last quarter? What was that like for you?

Look, incredible. In many respects, though, the market actually did what it was supposed to do. You had this incredible surprise reaction to something where we were completely not used to what we were seeing, which was a tariff schedule higher than Smoot-Hawley, and then you

got what you actually didn't get at the bottom in October of 2022, a volatility event, an actual capitulation that really presented the buying opportunity very, very clearly. And from our point of view, the surprise is the unrelenting speed with which the market continues the advance. Massive move, 20% plus off the lows on the S&P, 30%, something like that on the NASDAQ 100.

I sit here and I wonder, looking at 12 months now, can you say with confidence the outlook for earnings is getting better or worse at this point? It's definitely getting better, okay, because basically what has happened is you've had this adjustment from tariffs, and now that there is this presumption that you are going to get, and we can talk about the effect on interest rates later or what have you, that you're going to get some form of stimulus from

that is going to be more favorable to the 2026 picture. Obviously, the 2025 picture remains in flux, and we're going to find that out in a couple of weeks when the earnings season starts. But in general, the whole narrative of the economy having avoided a recession

is a reasonably positive backdrop. Let's put the one big beautiful bill on the side for one second and just go to the tariffs, which you mentioned are still at the highest going back to the 1930s and haven't fully been priced in yet when it comes to whether it's consumer prices, whether it's companies absorbing it in the profit margins. What makes you think this isn't going to show up in earnings in a material hit to profit margins for a significant number of

companies? Well, so the work that we've done was the expectation that roughly it'd be a 50-50 split. Larger companies will shoulder less. Smaller companies will shoulder more of the tariff hit. And yes, it definitely will fall into earnings. But again, there is this presumption that it is the one-time hit.

and that there will be this transition period, which obviously for the market began in the spring, but we're already sort of pricing through that. And again, what it points to is the resilience of corporate America, the ability to adapt, the ability to move supply chains, and the ability to figure out what a correct pricing strategy is. Are we putting an economic narrative to a market story?

to something that really is big tech names that continue to innovate in a technological boom that is trickling out into other companies at the same time that there are these independent factors that are very real that are affecting other asset classes. And we talked about the dollar. That might be where some of the vigilantes are going or this question of where the marginal buyer is going to be, how the market responds to negative news in the economy. How much are we making an economic argument for something that is now increasingly divorced from the economy?

Well, again, stepping back, the story of this year and in large part from our point of view, the reason that the advance off the April bottom has been as unrelenting as it's been is because we are now finding that corporate America is understanding

how to use AI constructively across all industries, not just for cost saves, but for revenue enhancement as well. And this is something that we think is going to continue to proliferate. And when you think about it, it's part of the reason, look, we're uncomfortable with where multiples are, which is why we think that you're likely to have a pullback. But on balance, it is something that supports higher multiples ex ante,

than what we've seen. Pull back when, though? Because you talk about a FOMO-driven melt-up. What if you missed that? So, look, it could be going on right now. But from our point of view, there's enough policy uncertainty out there that I would equate this more to the sort of FOMO that we had in and around the election.

Remember, a lot of froth there, you know, led by crypto names, led by names that were tied into the Trump administration. And I think we're seeing a lot of the same thing now. But again, the actual activity supporting a more prolonged period of FOMO

hasn't materialized yet, we do think you need to get less policy uncertainty to get to that period. What uncertainty unnerves you the most? Lisa mentioned tariffs. Right now we have this debate on the one big beautiful bill, but no one thinks it's not going to pass. It just might be an absolute slog and it's probably not going to come on July 4th. What's the uncertainty that makes you nervous to really want to

add more to your exposure? So I think it's A, what the response is going to be in and around July the 9th. That's the tariff story. But again, this other idea that we're seeing the resilience on the corporate earnings front

But if you go back to last Friday, it was really the first indication with the inflation numbers higher than expected and the income and spending numbers weaker than expected, GDP revised down, that yes, in fact, this theorized pass-through from tariffs might actually, in fact, be hitting. What's the best outcome for July 9th? Asked this question yesterday. Is it extend and pretend, keep negotiating, or 10% and move on?

What's the best outcome for you? I think it's, I think, well, you'd like certainty. I mean, if you just went to 10 and said that's it, that would be fine. The market would embrace that. But something leads me to believe that it isn't quite going to be that simple in negotiations. You're not alone, by the way. And I think this is interesting that the market is just sort of happy. And I think it was happy several months ago with the idea of a 10% universal tariff.

Move on to other things. Then companies can actually price it in. They can rearrange the supply chains. And like Julian said, the adapt and adjust, which you see in so many different companies, is what we've already seen with respect to half being absorbed by them, a little being absorbed by them, and maybe just a small marginal one-time price increase. And to your point, Jonathan, the market was happy. I was there. It was rallying when the president got up in the Rose Garden and said, here's a 10% across-the-board tariff. It only started to crater when they came out with the massive build

board of the reciprocal tariff rates that were extortion for some countries. Anchored us all to the extreme and now we're happy with 10%. And apparently even the EU is now happy with the 10% universal tariff. With carve-outs, in fairness. Sure, whatever. But what we've

That's not what we're going to get because we also have sectoral tariffs and you've got countries that are waiting for the 232 investigations to continue. These countries aren't arguing about the 10% universal tariff. They're not even debating it with the US at all. Which goes to the question of if you anchor to the extreme, is that the way to get people to all accept something that would have been extreme? It's a massive U-turn to when I was in the Netherlands last week and they said they wouldn't

not accept a 10% across the board tariff. Now, a week later, okay, fine, we'll accept 10%, but we need some help on steel and autos. What's the relationship between your outlook for the equity market and what's been happening in fixed income? No, it is definitely a mystery. There's no question about it. And it almost makes you wonder...

as if there might be a time where, let's say, this bill passes and then we wake up and yields start moving higher by a reasonably significant amount. But at the end of the day, if you look at it, the yields have been going sideways for two years.

Okay. Literally somewhere between four and four and a half for two whole years. And frankly, that's perfectly fine for the equity market because again, that removes part of the uncertainty. Well, okay. They've said the same, but the back,

has been very different economically. People went from a very high benchmark interest rate understanding of the world that was high inflation to one that now if you put all of the other potential tariffs and other disruptions out of the picture, we would be looking at pretty much close to 2% inflation rate. We're looking at basically mission accomplished. So is this highlighting a new premium?

that will ultimately challenge U.S. valuations and risk markets in a way that has not fully been appreciated? Well, there's certainly an element to that. However, the countervail to that is that we are likely to get a new Fed chairman sometime next year that is going to be, let's say, a little bit more accommodating

in terms of bringing interest rates down. Let's say that they are accommodating and taking sharpie messages of the world's interest rates and saying, okay, we'll cut three percentage points in this meeting regardless of what happens. What happens to the long end in that situation? You will get a yield curve steepening, the likes of which most...

investors do not remember that 20 years ago and so on, twos, tens was more in the neighborhood of 150 over rather than 50 over, a very rapid steepening. And frankly, when we think about what the risks to the equity market are, 10-year yields going through 5%, far and away at this point, are the most significant risk. - When can that happen?

Again, it just, the psychology right now is telling you it doesn't seem likely, you know, 'cause as John pointed out, you know, counter to expectations, and really the same way the dollar weakness is counter to the expectations of people that thought tariffs would be bullish to the dollar.

It really just takes a turnaround in psychology that we don't see. But I would suggest that if the inflation data continues to firm at the same time, we get more sort of pushback on the direction of tariffs. That's the mix that sends the dollar move. I think Julian speaks to exactly the risk you describe.

Just go through the scenario. You face a situation where you do get a Fed chair. This, let's say, is more willing to drop interest rates regardless of what's happening elsewhere. You get the curve steepening you described. You get all the debt issued at the front end.

with the Federal Reserve cutting interest rates, that's precisely one of the reasons you're seeing the dollar strength that's been developing, Lisa, over the last several months. What is the fear that this is going to be a Fed that's going to try to monetize the debt, that's going to try to essentially print money to offset this by having rates at a very low level and then just printing money at that level? And how much does it take at this point

to create dollar strength, given that that fear has been embedded in the overall investor base. Isn't the president actually arguing for that right now? Yes. Over the last several months? 100%. Almost explicitly saying that he wants the Federal Reserve to drop interest rates so they can issue debt at the front end and get lower interest rates? He's saying there is a direct connection between the Fed's rate policy

and what the U.S. pays in interest payments. And then Scott Bessing came out and said, yeah, we're not going to term out the debt. We're going to focus on the front end because right now the term premium is just too great. So you put those together, and that is, to your point, explicitly calling for the Fed to help the country lower its interest payments. In the Sharpie, black and white, you have cost the USA a fortune and continue to do so. He's talking about the net interest we are paying on our debt.

which has basically toppled the entire US budget higher than defense spending. - Quick final word, dollar weakness. How much of a tailwind is that for the S&P 500? - It's definitely been significant and it has definitely contributed among other reasons for the large cap outperformance over small cap.

In general, it tends to be a positive, but again, there's always sort of until it isn't. And I would suggest, and it's not our base case, that there are going to be issues around getting this bill passed. But if we start getting towards August, and again, not our base case, that is where you run into problems. There's so many reasons for dollar weakness, which I think makes the pain trade at Q3 dollar strength.

That's got to be the pain trade at Q3, dollar strength. Who's positioned for that? I couldn't agree more. I was thinking people say that there's going to be a stimulative effect. Now, Anne-Marie would argue with this from the one big, beautiful bill. Let's say that plays in with better than expected earnings and economic data. What does the dollar do?

Julian, it's good to see you, sir. Thanks for dropping by. Thank you. Julian Emanuel there of Evercore as we kick off the second half of 2025. Up next, the former NEC Deputy Director, Everett Eisenstadt, as the EU comes to the table for trade talks, plus your movers with Danny Berger, the latest on Tesla.

in case you missed it on the opening train. I think we could go to, say, 140. That's the type of... 140. Absolutely. We're at 114 right now. We're at 114, yeah. That's why I had to check. Yeah, yeah, yeah. This is the scale of moves. Over what time frame? This could be...

within one or two years. That's fast. That's fast, absolutely. I mean, if you look at how fast the dollar fell from 2002 to 2004, it was similarly large as this. To me, it's not out of the realm of possibility. I'm just sitting here with my jaw slightly open. So take us to the U.S. economy. I mean, does the underlying state of the U.S. economy matter in that trade? It seems as if interest rate differentials and the state of the U.S. economy may be pushed to the sideline by this broader situation.

big picture narrative that you described. - Absolutely, yeah. The normal cyclical dynamics, much less important with this type of structural change. - Don't miss the opening trade live every weekday.

in case you missed it on The Pulse. I think the idea of wait and see and pause is really yesterday's news. Our best advice to CEOs right now is that if you're not operating differently than you were a year ago, you may be falling behind. Yes, we need to build resilience, but we need to also build growth despite the environment. And that requires a different strategy than just a year ago. Don't miss The Pulse live every weekday.

Welcome to the second half. Live from New York City this morning. Good morning. Your scores look like this. Equity futures negative by two-tenths of one percent on the S&P, following back-to-back all-time highs on a benchmark in the United States. We're coming into Q3 on a three-day winning streak. On the NASDAQ 100, after a major rally off the lows of April, we're down just 0.3 percent. With three hours until the opening bout, let's get you some morning movers. ♪

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We'll roll over and accept the Senate's more material deficit increases. Henrietta joins us now for more. Henrietta, welcome back to the program. Just describe what's taking place in the Senate right now and whether you believe we're pretty close to getting this done.

Yeah, it looks like we're in force it mode. We've got JD Vance going up to the Senate, clearly indicating with some muscle that he's there to break a vote if he needs to and be the holdout. But I wanna just emphasize one thing here. Him having to vote for the bill now means that over the last 72 hours, the trajectory of this bill has actually lost a senator.

along the way. So his vote was not needed for the motion to proceed on Saturday night, and now it is. And that's not necessarily, that's obviously not a good sign. And I think a big part of that could be the distributional tables that were released by the JCT at about two o'clock this morning, which show the top bracket is gonna see $12,500

when this bill is passed in the lowest bracket is going to see 150 bucks. So that's really the fallout here. That's what's got Alaska all flipped out. We've got some problems still. Henrietta, is it when it comes to the senator of Alaska, Lisa Murkowski, is she the one that Majority Leader John Thune has to flip?

She's essential to the package. What we always watch, and it's been decades now, is the combination of Collins and Murkowski. And let's not forget that Dan Sullivan is one of the Alaska senators that's actually up next cycle. So when you get 35 percent of the Medicaid recipients in Alaska that are under risk of seeing their cuts or their health care lost, that's a material problem for the state. But then we still have the IRA issues that are critical to Medicare.

Maine and a whole host of other states as well. So I think we actually have a little bit longer to go before this is all nailed down. In your note, you think that in the end, the final passage will get Murkowski and Senator Collins vote. But Senator Collins had an amendment earlier this morning when it would give more money to rural hospitals in lieu of raising the tax rate on those making $25 million or more. And that was struck down. So is she a no now, given her amendment went down in flames?

You know, in my experience, that's more of a messaging document. You're not going to get Republicans to vote for tax increases for any individual brackets. Even President Trump tried to do that earlier on in the year, and the party killed it pretty quickly. So I see that more of as a message and, you know, pretty serious signal to Senator Collins, who is also up for reelection next cycle, that she has another workaround.

But the fact again that Vance is there means she might be a no vote. And she made it really clear during the motion to proceed on Saturday night that she was only voting to proceed. She did not have support for the underlying bill. So Vance being there suggests that they have lost a senator from the process alone.

Henrietta, then this goes to the House and you think the House just accepts it. Although we're already seeing some House members come out, the SALT caucus, I don't like what they did to tweak what happened with the SALT cap. You have the House Freedom Caucus saying, actually this raises the deficit. We're going to be increasing spending. Why are you so sure the House is just going to take this on the chin?

Yeah, and I'm sorry it's been a long night, but I got to say the Salt Caucus has to sit down. I mean, they've gotten enough of their carve out. They got a 40K cap. They've got it up to $500,000 for an income bracket. So they've gotten what they're going to get. That's why the distributional tables are so bad. I would really expect that the Murkowski-Earnst-Grassley bill on the IRA or the amendment has to pass in order to satiate the House bill.

IRA supporters, of which there are anywhere between 18 and 30 members. To me, that's a bigger caucus than the SALT conference has already gotten as much as they can ask for, much more than I anticipated indeed. So I think that they need to sit down and we need to move into the IRA place. We haven't even gotten an amendment vote on that bill yet. So we need to see that happen. We're getting closer. Henrietta, thank you. Henrietta Trace there of AIDA Partners.

Let's turn to the bond market and the Federal Reserve. Colin Martin of the Swab Center for Financial Research writing, expectations for the number of Fed rate cuts this year continues to increase despite the relatively stable labor market. Colin joins us now for more. Colin, good morning. Good morning. Can you explain that then? Why is that happening? Well, I think it has to do with the idea that inflation actually continues to move lower despite the fact that tariffs are in place. If we take a

take away the tariffs, which we can't do of course, but absent the tariffs, the Fed probably would have cut already. And if we look at what's going on in the inflation data right now, we're still seeing that dichotomy between services and goods. And we are seeing a slight pickup in the goods inflation, specifically things coming in from China, but we're seeing a lot of disinflation or maybe even deflation on the services side. So the inflation data suggests that they could be cutting absent those tariffs.

But the labor market's still holding up. I mean, maybe that starts to change soon. But what I think is really remarkable is if you look at that unemployment rate, 4% to 4.2%, that very narrow range for 13 straight months. It's expected to increase a little bit when we get the report on Thursday. But if it doesn't, if it's 4.2%, that's 14 straight months. The labor market's holding in.

We're seeing the low hiring, low firing, but that's okay for the economy to kind of continue to chug along right now. So that's doing okay. I think the concerns in the second half of the year now that it is July is what happens next.

and will we start to see the weakness in that labor market, given that the tariffs have to have an impact somewhere. If they're not passed along to the consumer, does that impact margins, which therefore might impact the labor market? So right now, we're kind of stuck between the rock and a hard place, but all signs are suggesting we get rate cuts later this year. If we rewind to April 2nd, the narrative was the tariffs will cause the inflation rate to surge,

And deficits will ignite bond vigilantes with their pitchforks to never buy U.S. bonds ever again. Are we saying both of those things are not true? Well, on the tariff front, that's the confusing part right now. If you look at Fed expectations, even though there is kind of some vocal members who think we can be cutting soon, if you look and dive into the Fed projections, the median projections suggest inflation should increase. And even if you look at that range,

The lowest expected inflation, core inflation rate by the end of the year is still 2.5%. So there's still an expectation that it should increase prices. We just haven't seen it yet. So there's this idea that maybe people imported goods early in advance of this. They haven't chosen to pass it through. We think there has to be some sort of impact at some point. Of course, not the full effect of the tariffs. But some of it should get passed along, especially when you add in the fact that the dollar's declined. So you have that working against you as well.

On the bond vigilantes, they don't care right now. We've long held that debts and deficits are not a key driver of the direction of long-term interest rates. We've always focused on monetary policy and growth and inflation expectations. We dialed that back a little bit recently just because our debt continues to grow, and there doesn't appear to be any interest in Washington to fix the situation. Okay, hold on a second. I'm sorry to jump in here. So deficits don't matter.

people could just keep on printing money until a point and then they do matter.

We've been talking about this all year. When do they matter? I mean, it's expanding right now and no one seems to care. Bond yields are actually lower on the day. Yeah, we don't have the number for when it matters because there just hasn't been the relationship. So how we've been framing it is because we get this concern from our clients at Schwab all the time. We hear about it, especially with everything going on in Washington. Is this going to send long-term yields significantly higher? And we say they're not. We don't expect the 10-year to get to 6%, 7%, 8% anytime soon. What we have thought

and which actually hasn't been the case over the past handful of days, is that maybe it keeps them elevated. We thought maybe the 10-year goes to that 5% range or maybe hovers between 4.5% to 5%. So instead of falling in line with potential rate cuts later this year, maybe the fact that debt needs to continue to rise, we need to attract new buyers to buy those, maybe that just kind of keeps them where they are.

But that's been proven wrong over the past couple of days as well. Would the bond market push back on a Fed chair that they don't see as credible? An extension of Trump, an extension of the White House? We've been talking about that a lot. What happens if we get what the administration's been hinting that they could do in terms of shifting their issuance from coupons to T-bills or a huge drop in the Fed funds rate? I mean, we've heard things from 200 basis points to 350 basis points.

That would pull short-term rates a lot lower, I would think. But I think that could weigh on the long end. We might see long-term yields fall initially just based on that supply-demand imbalance. But I'm not talking about what the new Fed chair might do next year. I'm talking about the fact that is this person seen as credible?

Right. To the institution. Yeah. That concerns us. We worry about a lack of Fed independence, and we know that can have bad impacts if the Fed chair and the committee as a whole are doing things that are more based on short-term goals that the administration wants versus what their dual mandate suggests, price stability and maximum employment. We do worry that that can have an effect on the Treasury market, specifically long-term Treasuries.

The dollar market, we could see the dollar continue to decline if that were to happen. So that is a worry of ours and it could send long-term yields a little bit higher. - Haven't they totally and utterly failed to hit the price stability side of their dual mandate for the last several years? - They have. We're moving in the right direction though.

Directionally, yes. But isn't that the ultimate criticism of them and this Fed chair? I know that he's celebrated a lot on Wall Street and by economists that work on Wall Street, but ultimately he's fallen short or rather fallen above where he should be for a long, long time now. And if you go back a few years ago when he delivered that speech at Jackson Hole, eight minutes of pain, then there wasn't any pain and everyone celebrated.

I'm not sure why they celebrated. Inflation never went back down to target. It was never mission accomplished, was it? Yeah. Well, technically, no. You're right. Definitionally, we have not gotten 2%. If anything, though, that calls for the rate to stay where it is or arguably higher. And

And that's, I think, where you get the lack of confidence in the market because you're right, we're not at that 2% goal yet. They're projecting it to continue to move higher at the end of this year if the tariff, in fact, plays a role. And yet there are these calls for rate cuts. So, you know, it is tough. And I think if we were to get a Fed, a new Fed chair or just the committee as a whole,

and they start cutting rates and we're still above target, I think that's a risk. That's the ultimate issue, which is why the criticism, to your point, is kind of misplaced at this Federal Reserve. They cut rates 100 basis points last year. Rates went up at the long end. So did mortgage rates. That's the thing you need to get your teeth into. Bob Michael of J.P. Morgan was talking about the same thing

earlier this morning. And it might be the consequence of cutting, certainly as much as President Trump would like. It really goes to this question of how you trust data. Because remember, last year, the SOM rule was triggered and it was a head fake. And the Fed took that on its face and it cut rates significantly. And maybe in retrospect, Fed chair doesn't think it was a mistake, but it raises a question, what data do you follow to understand that dual mandate when you're looking at inflation at a fuzzy moment and when you're looking at the labor market at a fuzzy moment?

The chairman of the Federal Reserve about 35 minutes away, alongside some of his peers, including the ECB president, Christine Lagarde, and the BOJ governor, Oueda. Look out for that a little bit later. Colin Martin and Charles Swart. Thank you, sir. Good to see you, Colin. Appreciate it. Thank you.

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Joining us now to talk about it right now is Blorino Urucci of T. Rowe Price. Blorino, let's talk about it. The low-churn dynamic that Lisa just gave a nod to. How much longer can we stick in that kind of situation, that kind of dynamic?

It's a very interesting dynamic for the U.S. economy right now. When you look at the flow of data up to date, you really see the labor market has loosened a lot. And that's come at the back of slowing demand for workers. I am not too concerned. We're not seeing a big pickup in the unemployment rate. But it does tell you that if the Fed were to base monetary policy purely on the progress made on inflation so far,

and the cooling in the labor market, I think they would be much more comfortable signaling cutting interest rates later this year. But the key here was what Mike McKee was alluding to earlier, that the outlook has changed so much and most of the risks point to upside

to inflation. And so the Fed has come so far, I think they're very reluctant to undo all the progress we've made and cut prematurely. And again, what matters for the economy and for the long end of the curve is if monetary policy is appropriately set or not. And we saw that in last September when the Fed cut interest rates by 50 basis points, but the long end

went higher. And that was basically telling the Fed that, wait a minute, the economy is resilient. Why are we cutting interest rates? I think this is not setting us up for success for the risks going ahead. And I think the Fed wants to avoid that situation this year.

There's been a tone shift, though, and John alluded to it when he started talking about the Goldman Sachs note that came out, Jan Hansius and the team, that brought forward rate cuts and see a greater number of them this year. Fed members themselves are saying it looks as though the inflation impact from the tariffs will be more of a one-time shock.

than they will some sort of protracted inflationary impulse. And you aren't seeing any kind of inflationary read-through from the labor market that is cooling, if not maybe even showing signs of cracks. Are you also coming around to that kind of conclusion where it seems to make sense for the Fed to cut more and sooner?

So my baseline for the Fed this year is two cuts, two 25 basis point cuts starting in September. I think the market has fluctuated between one and a half to three cuts at different points of the year.

The question is, can the Fed bring forward interest rate cuts to the July meeting? I think that's something that the market is not really prepared for. I don't think we have enough time to see a deterioration in the data that would push the Fed in that direction. So then what would make...

the Fed and the market price, let's say three or four cuts for this year, I think we would need to see a pretty big increase in the unemployment rate.

rate. Otherwise, even though the labor market is not a source of inflation right now, if you have a one or two time shock to inflation, even though it's not supposed to be persistent, it can de-anchor inflation expectations. So I'm looking at the unemployment rate here because that's the only way that you get a

the labor market to push the Fed off the fence. And when I'm thinking about the unemployment rate, there are two components that matter. One is labor demand and hiring and firing. I think labor demand has cooled significantly, but we're not seeing mass firing yet. And then I also think the break-even rate of employment has come down a lot.

The break-even rate of employment is that which keeps the unemployment rate steady. It doesn't go up, it doesn't go lower. It's come down a lot because net migrant flows have decelerated in the last 12 months or so. And so with weaker labor supply, it's much harder to get the unemployment rate to increase a lot unless you have mass firepower.

So I think we're here at an uneasy equilibrium. And so for me, it makes a lot of sense for the Fed to tread carefully. So I feel comfortable with keeping two interest rate cuts in my outlook for this year. What's the potential for upside surprises later in the year, particularly once the one big, beautiful bill has passed and once people have more certainty around what the tariff outlook looks like?

So in terms of inflation upside surprises, I see two pivotal moments. In the next two to three CPI reports, I'm looking for signs that we're getting significant pass-through to consumer prices from higher tariffs.

What we see so far is import prices have not budged. So that's telling me that exporters into the U.S. are not adjusting prices. So then that leaves domestic firms and consumers as the agents that are going to bear the brunt of

the tariff increases. We also have a weaker dollar, so the currency is not helping us on the inflation front. So I'm looking at the CPI reports for upside risks, and that's the one-off shock that everybody's talking about. But then we have the one big beautiful bill,

I think there is a real chance that this stimulates demand in the near term. So then the next risk that I see to inflation is in 2026 from fiscal policy. I think we learned our lessons from the supply chain disruptions and from the fiscal bill post-COVID that they can push inflation higher. I don't think the size of the shocks right now is as big as it was back then.

But I do think it's realistic to expect some upside to inflation. Blorini Rigi of Tiro Price, thank you so much. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.

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