“As long as inflation expectations remain bound and anchored, the Fed will probably not react as aggressively or as early, but the Fed cannot afford not to react to a spike in inflation expectations,” he said.
Higher tariffs on Canada and Mexico are particularly concerning, given the deep trade ties between these countries and the US, he noted. Unlike past tariff hikes focused on China, these measures directly affect long-established supply chains. While businesses may have some inventory buffers, tariffs will eventually raise consumer prices.
Aziz noted that equity markets worldwide have relied on US strength, but recent shifts in policy have dented confidence. In times of uncertainty, investors prefer safer options, which means countries like India may struggle to attract foreign money.
India’s recent foreign investments were mostly due to its inclusion in global bond indices. “It’s very hard to see flows into emerging markets when you have a risk-off environment.”
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Aziz said that markets respond to what happens first, and so far, they have mostly seen “sticks, not carrots.” This means investors are seeing tough policies instead of supportive measures like tax cuts or deregulation.
The US dollar has remained strong because of high interest rates, but concerns about slower economic growth could weaken it. Aziz explained, “The forces that would drive US dollar outperformance are being pushed back.” While interest rates still support the dollar, fears about the economy could stop it from gaining further strength.
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For the entire interview, watch the accompanying video