Fed meeting preview, how trade tensions challenge firms’ climate ambitions, AI adoption and Europe’s labor markets

The Fed is expected to keep interest rates on hold at next week’s meeting amid uncertainty over the impact of tariffs on growth and inflation. Business surveys strongly suggest that companies will be passing on higher input costs to the consumer from the summer. In the meantime, manufacturing margins were likely squeezed (1pp of current sales), given expected lags between rising costs and price increases, which were absent in the post-Liberation Day CPI prints of April and May. We estimate peak headline CPI inflation at around +3.9% y/y in early Q4 but the Fed will likely look through the tariff-induced rise in inflation, especially given households’ elevated inflation expectations and a positive output gap. We now expect a first cautious -25bps rate cut in December, followed by a slow pace of easing through 2026, taking the Fed Funds rate to the 3.25-3.5% range in July 2026. Downside risks to growth or financial stability risks would have to increase substantially for the Fed to act earlier than expected.

Increasing geopolitical and economic uncertainty is reshaping companies’ climate ambitions. According to the Allianz Trade Global Survey, businesses remain strongly committed to ESG principles, with 84% reporting active involvement from senior management – up from 77% in 2024 – driven by gains in Germany, Poland and Italy. Key priorities include developing sustainable products, enhancing supply-chain resilience, and increasing investment in green technology. However, only 22% aim to reduce CO₂ emissions by more than 5%, down from 31% in 2024. Many are now setting more modest targets of 1-3%, especially in Germany, France and Spain. While confidence in achieving net zero has increased (84% feeling on track), rising US-China trade tensions and protectionist policies threaten this progress. The US's growing clean tech trade deficit and policy uncertainty contrast sharply with China's expanding export dominance. While many global markets benefit from cheaper green technologies as China diversifies its exports, rising protectionism, especially in the US, will continue to drive up costs.