Top US Fed official warns tariff-driven inflation boost is ‘inevitable’ 

BOSTON - US Federal Reserve Bank of Boston president Susan Collins said it looks “inevitable” that tariffs will boost inflation, at least in the near term, adding that it is likely appropriate to keep interest rates steady for longer. 

While tariff-driven inflation could prove short-lived, Ms Collins said it is possible that price pressures could prove more persistent.

“It looks inevitable that tariffs are going to increase inflation in the near term,” Ms Collins said on March 27 during a fireside conversation in Boston. “My kind of modal outlook would be that that could be short-lived with a continuation of some disinflation, but further in the future than I might have expected before.

“But there are risks around that, and depending on how things unfold, it may be more persistent and a larger increase.”

Fed officials on March 19 left interest rates unchanged, for a second straight meeting. Policymakers have said borrowing costs are well positioned to wait for greater clarity on the economic impact of US President Donald Trump’s policy changes, including trade and immigration.

Chair Jerome Powell said last week that the economy remains strong and the labour market is solid despite elevated uncertainty. He also said that any tariff-induced inflation is likely to be transitory. St Louis Fed president Alberto Musalem, however, said on March 26 that policymakers should be wary of assuming that such inflation would be entirely temporary.

Ms Collins highlighted two channels to watch for the impact of tariffs on inflation. Those include import prices, which she said tend to reflect levies quickly, as well as the degree to which higher costs are passed along to consumers.  

The Boston Fed chief said Americans might respond differently to a pickup in price pressures than what is being suggested by economic models, given the recent period of high inflation.

Fed officials marked down their estimates for growth in 2025 while lifting their bets for inflation, according to updated projections released after the central bank’s latest gathering. They also raised their estimates for unemployment, while noting there is increased uncertainty for their forecasts. 

Ms Collins said it is too early to predict the economic impact of tariffs, though she said a downturn in demand from worsening consumer sentiment is a “very plausible” scenario.

Even so, she said the fundamentals of the economy remain robust. Currently, data points to a “wait-and-see” attitude among consumers, she added. 

She highlighted the importance of inflation expectations, especially in a situation of more broad-based levies and retaliatory measures.

“That’s something that I take very seriously, and we’ll have to watch the data and see how things unfold and make decisions accordingly,” she said.

Several measures point to a pickup in consumers’ estimates for price increases in the near term, and a University of Michigan gauge of inflation expectations over the next five to 10 years has surged to its highest level in more than three decades. BLOOMBERG