Inflation has been muted over the past two months despite the imposition of tariffs and we suspect that market participants may have become complacent. Consensus expects a 0.3% MoM print for both headline and core CPI, while breakevens are pricing in a 0.26% MoM print. Judging from these estimates, the market is not sure if inflation would pick up in the near term, especially given limited tariff passthrough thus far. However, there is some wariness with the 12-month breakeven fixing implying annualized inflation of around 3.3%. With Trump once again ratcheting up tariff threats on Europe, Canada and Mexico, some inflation concerns are likely to build. If YoY CPI settles at close to or above 3% in a year’s time, this may constrain how far the Fed can cut without clear signs of a slowdown.
We also note the increased speculation that Fed Chair Powell may leave his role. This comes after new criticisms on office renovations from Trump officials, which could be a plausible lead up to Powell being fired “for cause.” At this point, we still see Powell leaving his role before his term ends (May 2026) to be a low probability event. However, if the odds start ratcheting up, we suspect that a strong risk-off tone would ensue, perhaps overriding any of the tariff narratives that are in play. If Powell leaves, we expect the curve to steepen sharply with the short end factoring in frontloaded rates cuts. Meanwhile, the loss of confidence in price stability should translate into sharply higher 10Y and 30Y yields. Higher long-end yields could be against what the Trump administration is trying to achieve and that may well require a second order response from the Fed, which might include some form of QE or YCC to sooth market dysfunction. A shadow Fed Chair (earmarked to succeed Powell) appears to be a more plausible scenario. This person may not have voting rights but can certainly exert pressure on the Fed to be more dovish. Breakevens would likely rise to reflect increased odds of a more dovish Fed in the coming few years. 
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