Fed Faces Dilemma as Inflation Sticks, Demand Weaks

DBS Group Research economists Taimur Baig and Chang Wei Liang argue that the Federal Reserve faces a tough decision regarding interest rates.

The Fed's dilemma stems from sticky core inflation, which has risen to over 3% since December 2025, driven by electronics, immigration, tariff, and services prices. This is concerning, especially given the Fed's target of 2% inflation.

However, the economists point out that the macro data flow at present is mixed, with some indicators suggesting a wait-and-see approach. They highlight soft consumption, weak investment, muted wage growth, and heavy public debt issuance as reasons to hold rates steady for now.

The economists note that sticky inflation argues in favor of rate hikes, but the current economic conditions suggest a pause is warranted. They expect the Federal Open Market Committee (FOMC) to keep rates on hold near term.