The Federal Reserve's most closely watched inflation indicator in April came in slightly below expectations, however, since the outbreak of conflict in the Middle East, the upward trend in inflation has persisted, Karsten Junius, the Chief Economist and Head of Economic and Strategy Research of J. Safra Sarasin, wrote.

Last year, amid a slowdown in the economic cycle, Fed officials could afford to look past tariff-induced inflationary pressures, but the situation is now visibly different.

Ongoing adverse supply shocks may lead to a de-anchoring of inflation expectations, a risk the Fed can hardly tolerate. As the labor market stabilizes, the current risk balance tilts more toward raising policy rates rather than lowering them.

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