US Faces Inflation Threat as Fed Risks Repeating 1970s Mistakes, Experts Warn

Economic

Summary:

Experts are raising alarms over the potential return of inflation in the U.S. economy, echoing concerns about a possible repeat of the stagflation crisis of the 1970s.....

Economic Concerns Mount Over Potential Inflation Surge

Amid signs of economic resilience, some experts are sounding the alarm about the risk of a severe inflationary surge in the U.S., drawing comparisons to the stagflation crisis of the 1970s. While many economists remain optimistic about the strength of the U.S. economy, macroeconomic research firm TS Lombard has issued a stark warning: the U.S. may be on the brink of facing another inflationary crisis akin to that of the 1970s, when rising consumer prices triggered a period of stagflation slow economic growth coupled with high inflation.

Stagflation, widely regarded as one of the most challenging economic conditions to manage, poses a unique dilemma for central banks. When inflation is high, central banks typically cannot lower interest rates to stimulate the economy, as is done in conventional recessions. TS Lombard’s Chief Economist Dario Perkins pointed out that the U.S. Federal Reserve (Fed) may be repeating mistakes made in the 1960s by loosening monetary policy right before inflation accelerates, potentially setting the stage for a similar crisis.

Rising Inflation and the Risk of Overstimulation

The primary cause for concern stems from the fact that inflation, while easing recently, has been influenced largely by significant supply-side shocks, such as tariffs that disrupted production and trade. According to Perkins, while inflationary pressures have eased in 2025, consumer demand could rebound in 2026, driving prices higher. He cited four key factors that could reignite demand and, consequently, push inflation back up:

Pent-up Demand: After several years of uncertainty surrounding tariffs and the labor market, consumer spending could surge once these issues are resolved. As tariffs stabilize and the labor market improves, consumers might feel more confident about making larger purchases.

Fed’s Monetary Easing: The impact of the Fed’s recent rate cuts is already visible in sectors sensitive to interest rates, such as housing and consumer goods. Sales of new homes surged by 20% in August, and mortgage refinancing activity spiked in September, signaling a potential boost to the economy that could reignite inflationary pressures.

Global Central Bank Coordination: While the Fed has only recently resumed easing, other central banks have been cutting rates for much of the past year. Perkins noted that this synchronized global monetary stimulus could boost global growth in 2026, further fueling demand for goods and services.

Fiscal Stimulus: Fiscal policies, such as former President Trump’s proposed “One Big Beautiful Bill,” as well as stimulus plans from countries like Germany and China, could increase demand in the U.S. and globally. These fiscal measures are expected to drive higher consumption, which, in turn, could push prices upward.

Historical Parallels to the 1970s Economic Crisis

Perkins warned that if these factors combine with the Fed’s rate cuts, the U.S. could face a prolonged period of high inflation, possibly leading to stagflation. This scenario would be reminiscent of the late 1960s and 1970s, when the Fed’s premature monetary easing led to a sharp rise in inflation, which peaked at nearly 15% by 1980.

Although Perkins did not predict that the situation would become as dire as in the 1970s, he stressed that the combination of rate cuts, supply-side shocks, and political interventions could push the economy into a dangerous zone. The U.S. economy’s current resilience, as seen in strong GDP growth and low unemployment, could mask underlying risks if inflationary pressures are not managed properly.

Fed’s Policy Dilemma and Market Expectations

Despite these warnings, many economists do not foresee a full-blown recession or widespread stagflation in the U.S. in the near future. However, investors are increasingly questioning whether the Fed has enough room to continue cutting rates as anticipated. On September 25, 2025, the probability of the Fed holding interest rates steady rose from 8% to 14%, following strong GDP growth and lower-than-expected unemployment claims data. At the same time, the likelihood of two additional rate cuts before the end of the year dropped from 73% to 63%, according to the CME FedWatch tool.

This shift in market expectations reflects growing concerns about the potential long-term impact of the Fed’s policy decisions. As the U.S. economy shows resilience, the central bank must navigate the delicate balance between stimulating growth and avoiding an overheating economy that could reignite inflation.

As inflation pressures remain a concern, the U.S. Federal Reserve faces a delicate challenge in managing interest rates without stoking further inflation. The risk of repeating past mistakes from the 1970s, when premature rate cuts contributed to stagflation, looms large. While experts disagree on the likelihood of a full economic crisis, the combination of supply shocks, fiscal stimulus, and global monetary easing could trigger renewed inflationary pressures in the years ahead. The Fed's decisions in the coming months will be critical in determining whether the U.S. economy can avoid a repeat of the stagflation crisis.

Source: BI

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Economic

Rupiah Under Pressure as Indonesia Faces Economic Turmoil

The Indonesian economy, the largest in Southeast Asia, is showing signs of distress as the rupiah approaches a record low against the U.S. dollar. On Friday, September 26, 2025, the rupiah was trading at 16,788 per USD, just 1% above the lowest level it had reached in April of the same year. In response to this, the Bank of Indonesia (BI) has pledged to take all necessary measures to stabilize the currency and protect the country's financial environment.

Bank of Indonesia Governor Perry Warjiyo emphasized that the central bank is fully committed to using every available tool to stabilize the rupiah. This includes both domestic interventions, such as spot transactions and government bond purchases, and international measures. The BI’s actions come at a critical juncture, with Indonesia’s currency facing significant downward pressure due to external factors, including a strengthening U.S. dollar and investor concerns about the country’s fiscal policies under its new finance minister.

Challenges Facing Indonesia’s Currency and Market Sentiment

The global market’s reaction to the U.S. Federal Reserve's interest rate policies has played a key role in the recent struggles of the rupiah. With the dollar regaining strength as U.S. interest rate cuts appear less likely in the near term, many Asian currencies are under pressure. In Indonesia, investor sentiment is further exacerbated by concerns over the new government’s fiscal policy and the country's growth prospects. These factors have contributed to a heightened risk-averse stance among investors, affecting both the currency and the broader market.

Rajeev De Mello, a global macro portfolio manager at Gama Asset Management, highlighted that while intervention may be necessary, it can be costly and may not necessarily yield results if investor sentiment continues to sour. The shift in investor behavior from risk-taking to risk-avoidance could put even more pressure on the rupiah if the current economic uncertainty persists.

Bank of Indonesia’s Response and Market Outlook

Despite these challenges, Governor Warjiyo remains confident that the BI’s intervention measures will effectively stabilize the rupiah. The central bank’s actions have already included direct market interventions, such as spot transactions and the use of non-deliverable forwards contracts, as well as purchasing government bonds. While the BI has refrained from specifying numerical targets for the rupiah’s stabilization, Warjiyo believes these actions will ensure the currency maintains its value in line with fundamental economic conditions.

The central bank’s intervention strategy is designed to restore confidence and stability, but the long-term success of these efforts will depend on the broader global economic conditions, as well as domestic fiscal policies. Indonesia's currency remains vulnerable to shifts in global investor sentiment, particularly as the Federal Reserve’s policies continue to influence global markets.

As Indonesia’s rupiah struggles near record lows, the actions taken by the Bank of Indonesia will be closely watched by both domestic and international markets. The central bank’s robust intervention strategy, while critical, may face challenges if global market conditions continue to deteriorate. Indonesia’s ability to stabilize its currency will largely depend on restoring investor confidence, addressing fiscal concerns, and navigating the shifting dynamics of global interest rates. The outcome of this intervention may set the tone for Indonesia's economic trajectory in the years to come.

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The European Union and Japan expressed confidence on Friday that they had secured limits on U.S. tariffs on pharmaceuticals, which President Donald Trump said he would impose next week at a rate of 100%.

The European Commission referred to a joint statement agreed with the United States following its end-July trade deal, which states that the tariff for pharmaceuticals, semiconductors and lumber would not exceed 15%.

"This clear all-inclusive 15% tariff ceiling for EU exports represents an insurance policy that no higher tariffs will emerge for European economic operators. The EU is the only trade partner to achieve this outcome with the US," a Commission spokesperson said.

Japan also referred to its joint statement with Washington, which said that U.S. tariff rates on Japanese semiconductors and pharmaceuticals would not exceed those applied to others such as the European Union.

In a post on Truth Social on Thursday, Trump announced a fresh round of tariffs that also covered trucks at 25% and furniture at 30-50%.

Trump said the pharmaceutical tariff of 100% would apply to branded or patented drugs unless a given pharmaceutical company is building a manufacturing plant in the United States.

Swiss company Roche said on Friday that one of its U.S. units has recently broken ground on a new facility.

Swiss rival Novartis, which also made a large U.S. investment pledge earlier this year, did not immediately reply to a request for comment.

An industry source estimated that, based on the initial U.S. indications, the tariffs as outlined by Trump on Thursday would probably not apply to the two Swiss companies.

Source: Yahoo Finance

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Tokenised Deposits Gain Traction Amid Bank of England’s Caution on Stablecoins

The UK’s leading banks are accelerating their efforts to develop tokenised versions of customer deposits, despite Bank of England (BoE) Governor Andrew Bailey's reservations about the role of stablecoins in the financial ecosystem. These developments come after Bailey’s public call in July to focus on tokenisation, a technology he believes offers more tangible benefits for the financial system compared to stablecoins, which have grown in popularity as a digital asset pegged to a fiat currency.

Tokenisation refers to the digital transformation of assets like deposits, bonds, or stocks into blockchain-based tokens. Proponents argue that tokenisation can improve transaction speed, lower costs, and enhance security. The major banks in the UK, including HSBC, NatWest, and Lloyds, have already initiated a pilot programme for tokenised deposits aimed at streamlining payments on online marketplaces, with UK Finance noting that the pilot is part of the wider effort to integrate these innovations into existing financial frameworks.

Bailey's Concerns Over Stablecoins and Their Impact on the Banking System

Governor Bailey has expressed skepticism regarding stablecoins, highlighting their potential to undermine the banking system by taking money out of regulated institutions and posing risks to financial stability. In contrast, Bailey advocates for tokenisation, which allows the digitalisation of deposits while maintaining the integrity of the traditional banking system. His statements reflect a broader view within the BoE that innovation should work within existing regulatory frameworks, rather than challenging the current financial system with unregulated crypto assets.

The debate surrounding stablecoins has gained momentum in the wake of regulatory developments, such as the U.S. GENIUS Act, which has brought more clarity to the stablecoin market. Despite the global growth of stablecoins, Bailey’s cautious approach is in stark contrast to the enthusiasm surrounding these new digital assets. His warnings aim to steer banks away from the risks of issuing their own stablecoins, urging them instead to embrace innovations like tokenised deposits.

Tokenised Deposits: A Step Toward Regulated Financial Innovation

Unlike stablecoins, tokenised deposits are fully aligned with existing banking regulations, offering a way for banks to explore digital transformation while ensuring the safety and stability of transactions. The pilot programme involving banks like Barclays, Nationwide, and Santander will test various use cases, such as remortgaging and the settlement of digital assets, which could potentially reshape the landscape of digital finance in the UK.

While tokenised deposits lack the branding appeal of stablecoins, UK banking officials stress that they represent a crucial technological upgrade that could revolutionise the way financial transactions are processed. The pilot will continue until mid-2026 and will help banks evaluate the practical applications and scalability of tokenisation in retail banking and beyond.

Global Comparisons and Future Prospects

The push for tokenised deposits in the UK comes amid similar developments across the globe, with European banks also eyeing the launch of euro-denominated stablecoins. However, as the Bank of England continues to weigh the risks and benefits of various digital assets, UK banks remain focused on leveraging tokenisation to innovate within the regulated system.

In contrast, U.S. regulators have moved more decisively toward stablecoins, as evidenced by the clarity provided by the GENIUS Act. Nevertheless, tokenised deposits are seen as a more sustainable and secure approach to digital financial systems by many industry leaders, including Citi’s CEO, who indicated in July that tokenised deposits may prove more important in the long run than the development of stablecoins.

The ongoing tokenised deposit pilot in the UK represents a pivotal step in the integration of blockchain technology into the traditional financial system. While the debate between stablecoins and tokenisation continues, UK banks are positioning themselves to embrace the latter as a safe, regulatory-compliant innovation that can enhance the efficiency and security of digital transactions. The outcome of this pilot and its eventual integration into mainstream banking could set a precedent for other nations exploring digital asset innovations within their own regulatory frameworks.

Source: Reuters

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Malaysia Pushes for Tariff Exemptions on Key Exports

Malaysia has formally asked the United States to consider imposing zero tariff rates on several key export sectors, including furniture, automotive, and aerospace products. This request is part of ongoing trade discussions aimed at reducing barriers and fostering stronger economic ties between the two nations. A Malaysian trade ministry official confirmed that the U.S. is also considering tariff exemptions for Malaysian commodities, including cocoa and palm oil, products that are not domestically produced in the U.S.

These negotiations come amid a broader backdrop of rising tariffs on imported goods. U.S. President Donald Trump recently announced a new round of tariffs, which includes significant levies on imported kitchen cabinets and bathroom vanities, as well as upholstered furniture, both of which could impact Malaysian exports. The new tariff discussions are adding urgency to the ongoing talks between the two countries.

Progress in U.S.-Malaysia Trade Discussions

The trade talks between Malaysia and the U.S. gained momentum following a 19% tariff imposed on Malaysian imports in August. Both governments are working towards finalizing an agreement on tariff adjustments before a planned summit in Kuala Lumpur in October, where President Trump is expected to attend. Malaysian Prime Minister Anwar Ibrahim has expressed optimism about concluding the deal, emphasizing the importance of these negotiations in enhancing bilateral trade relations.

The request for zero tariffs on furniture and aerospace parts reflects Malaysia's strategic priorities in its key industries, which are vital to the country’s export-driven economy. If granted, these tariff exemptions could provide a significant boost to Malaysia’s competitiveness in the U.S. market, particularly in sectors where it already holds a strong position globally.

Significance of Tariff Exemptions on Commodities

In addition to the request for zero tariffs on manufactured goods, Malaysia has also requested tariff exemptions for agricultural products like cocoa and palm oil. These exemptions would be beneficial given that the U.S. does not produce these commodities at the scale of Malaysia, making it a key supplier. The potential exemptions are seen as a significant step towards deepening the economic partnership between the two nations, particularly in sectors where Malaysia holds an established global presence.

These discussions also highlight the broader trend of shifting trade policies, where countries are increasingly negotiating more favorable terms based on sectoral needs and economic strengths. Malaysia’s emphasis on these specific exemptions reflects the importance of these commodities to its domestic economy and global trade positioning.

The outcome of these tariff discussions will have far-reaching implications for Malaysia’s export sectors, particularly furniture, automotive, and aerospace. A successful deal could improve market access and competitiveness, bolstering Malaysia’s economic standing in the U.S. ahead of a major summit. As both sides seek to finalize the agreement before President Trump’s visit, the resolution of tariff issues could mark a pivotal moment in the evolving U.S.-Malaysia trade relationship.

Source: Reuters

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Investigation Triggers Market Response and Heightened Scrutiny

The U.S. Customs and Border Protection (CBP) has initiated a formal investigation into Waaree Energies Ltd., India’s top solar panel manufacturer, for potentially evading tariffs on solar cells imported from China and Southeast Asia. The inquiry is based on concerns that Waaree may have misrepresented the origin of these solar products, labeling Chinese-made solar cells as being from India to bypass punitive tariffs. The investigation, which also targets Waaree Solar Americas Inc., has led to interim measures by the CBP, fueling market uncertainty and causing a drop in Waaree’s stock by as much as 5.5%.

The probe follows a complaint from the American Alliance for Solar Manufacturing Trade Committee, which claims Waaree has been exploiting loopholes in the U.S. trade system. The U.S. solar industry, struggling to establish itself, has been pushing for stricter tariffs on solar imports, citing unfair competition from heavily subsidized foreign products.

Waaree’s Growth Amid Trade Tensions

Waaree Energies has grown significantly, with its stock price more than doubling since its debut in Mumbai in 2024. The Indian company’s strong performance has been driven by optimism around India’s renewable energy sector, a key area of focus for the Indian government. However, the company now faces potential setbacks due to the growing trade tensions between the U.S. and India, as well as the U.S.’s decision to impose heavy tariffs on solar imports from India and other Southeast Asian nations earlier this year.

This regulatory scrutiny highlights the broader challenges faced by the global solar industry, as countries seek to protect domestic markets while balancing trade relations. Waaree’s growth prospects, especially in the U.S. market, are now clouded by this investigation and the uncertainty surrounding its ability to navigate these tariff barriers.

Trade Probe Highlights Growing Frictions in Solar Sector

This investigation is part of a broader trend of increased scrutiny and protectionist measures in the U.S. solar industry. The U.S. Commerce Department recently launched a probe into solar modules from Indonesia, Laos, and India following complaints from U.S. manufacturers, who argue that these countries are unfairly subsidizing their solar exports. Similar tariffs were imposed on solar equipment from Vietnam, Cambodia, Malaysia, and Thailand earlier this year.

The U.S. solar industry’s push for higher tariffs is indicative of its struggle to establish itself as a competitive player in the global market. These actions reflect the broader economic dynamics at play, where developing countries like India are caught in the crossfire between protecting their burgeoning renewable sectors and facing retaliatory trade measures from major markets like the U.S.

Waaree Energies is now in a precarious position, as the U.S. probe threatens to disrupt its operations in one of the world’s largest solar markets. While the company’s growth in the Indian renewable sector remains robust, the ongoing trade tensions and potential tariffs pose significant risks to its international ambitions. The outcome of the investigation will likely have far-reaching implications, not only for Waaree but also for the future of solar trade between India, China, and the U.S. The case underscores the complex interplay between global trade policies, national energy ambitions, and the future of renewable energy industries.

Source: Bloomberg

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Economic

Interest Rate Path Signals a Departure From Ultra-Loose Policy

Makoto Sakurai, a former member of the Bank of Japan’s policy board, anticipates that the central bank will gradually raise its benchmark rate to 1.5% by early 2028, marking a notable pivot from its long-standing ultra-accommodative monetary stance. Under current Governor Kazuo Ueda, the BOJ has already initiated the tightening cycle with a rate hike to 0.5% in January 2025. Sakurai’s projection implies four or more additional increases in the coming years, with the next likely hike anticipated either in October or December 2025.

This expected policy trajectory reflects a broader normalization of interest rates, which aligns with the strengthening fundamentals in the Japanese economy. According to Sakurai, robust corporate profits especially among large exporters benefiting from a weaker yen and firm business sentiment provide a supportive backdrop for a steady path of rate hikes.

Domestic Resilience Supports Policy Shift Despite External Risks

The rationale behind Sakurai’s forecast is grounded in both domestic performance and external pressure. Internally, Japan’s corporate sector has shown resilience, with strong morale and earnings expected to be reflected in the upcoming “tankan” business sentiment survey due October 1. If the tankan confirms sustained optimism and profitability, it could give the BOJ a firmer footing to justify a near-term rate hike.

However, the timing of the hike remains contingent on how Japan absorbs the impact of recently imposed U.S. tariffs. While the data so far does not indicate severe disruption, Sakurai suggests the BOJ will remain cautious until the longer-term effects become clearer. This shows a correlational not yet causal relationship between U.S. policy actions and the BOJ’s rate decisions, though market signals, such as board member dissents, may hint at growing readiness to tighten policy regardless.

Monetary Divergence and Exchange Rate Dynamics Add Pressure

One of the external factors accelerating this shift is the growing monetary divergence between Japan and the United States. With expectations that the Federal Reserve may begin easing, while the BOJ contemplates hikes, the result is likely upward pressure on the yen. Sakurai underscores that a rising yen would be a natural market response, especially as Japan refrains from direct market intervention due to bilateral commitments with the U.S. to let exchange rates be market-driven.

Recent remarks from U.S. Treasury Secretary Scott Bessent criticizing the BOJ for being behind the curve on inflation further amplify the pressure. This introduces a subtle but increasing causative element, where foreign policy positioning and reputational risk may indirectly influence BOJ decision-making, especially if currency volatility or inflation expectations begin to spike.

Gradualism Likely to Define Ueda’s Approach Through 2028

Governor Ueda, whose five-year term ends in April 2028, is expected to preside over a historically significant phase in Japanese monetary policy. Sakurai’s forecast of rate hikes in fiscal years 2025, 2026, and 2027 implies a deliberate, phased tightening approach rather than aggressive tightening. This suggests the BOJ will prioritize predictability and market signaling over abrupt shifts, especially given Japan’s prolonged experience with deflation and weak wage growth.

The slow but steady pace is consistent with Ueda’s leadership style thus far and reflects the BOJ’s continued need to weigh inflation control against financial stability, while also responding to domestic economic strength and global policy divergence.

Japan Enters a New Phase of Monetary Policy Realignment

Sakurai’s projections, though not officially confirmed by the BOJ, reflect growing consensus that Japan’s monetary regime is entering a normalization phase. If realized, a policy rate of 1.5% would be the highest in decades and mark a clear break from the near-zero interest rate era. While internal factors such as corporate profitability and consumer resilience support the transition, external dynamics including U.S. policy, currency behavior, and trade tensions will continue to shape the timing and magnitude of each move.

The evolving outlook under Governor Ueda reinforces the BOJ’s cautious but firm intent to re-anchor its policy in line with both domestic recovery and the demands of a rapidly shifting global financial landscape.