MW Fed officials signal they are more worried about inflation than slow growth

By Greg Robb

Bar for easing rates in a non-recession scenario seems much higher than before

Several Federal Reserve officials in separate speeches Thursday expressed the view that the U.S. central bank needs to make sure to throw a wet blanket over inflation expected to result from higher tariffs.

While the Fed can't stop the initial burst of inflation, officials said they need to make sure inflation doesn't spread or the public will come to expect higher prices for their everyday necessities. In the Fed's thinking, once that happens, the battle against inflation is lost.

"I intend to keep my eye squarely focused on the outlook for inflation," said Kansas City Fed President Jeffrey Schmid, a voting member of the Fed's interest-rate committee this year, in a speech to a finance group.

At a research conference, Dallas Fed President Lorie Logan stressed "it will be important to keep any tariff-related price increases from fostering more persistent inflation."

Fed officials spoke after President Donald Trump's tariff plan was announced, which despite all the twists and turns on Wednesday resulted in boosting the U.S. effective tariff rate to 27%, the highest since 1903.

Boston Fed President Susan Collins, also a voting member of the Fed's interest-rate committee, said research at her reserve bank estimated that this tax on imports would result in core PCE inflation running well above 3% this year.

While tariffs might also slow the economy, Collins and other Fed officials signaled they are more worried about inflation than growth at this point.

In a speech at Georgetown University, Collins said that U.S. economic growth would be slow early this year from the surge to get ahead of tariffs, but this should unwind and boost GDP over the next few months.

The Fed has held its benchmark rate steady in a range of 4.25%-4.5% since December.

Traders in derivative markets expect 100 basis points of cuts in the Fed's benchmark rate by the end of the year.

Last month, the median forecast of the 19 senior Fed officials was for 50 basis points in cuts.

At the same time, eight of the officials projected that the best policy would be to keep rates above 4% through year's end.

Chicago Fed President Austan Goolsbee told the Economic Club of New York that the central bank should sit tight and wait to see the final shape of Trump's tariff plan.

In general, economists don't think the Fed's inflation-fighting rhetoric would preclude the central bank from cutting rates to help the economy if growth stumbled, but now think it would might take a lot of weakness to get the central bank to move.

At the moment, the unemployment rate remains low and the latest reading on claims for jobless benefits remained at low levels.

Michael Gapen, chief U.S. economist at Morgan Stanley, said the U.S. economy was going to be "living on the edge," with growth at a tepid 0.8% annual rate this year and a 0.7% rate in 2026.

But with inflation rising so much above the 2% target while the labor market slows, the Fed will be on hold this year, he said.

"In a sluggish growth outlook with high inflation, we do not foresee Fed cuts until March 2026," Gapen said. But a recession would bring cuts forward into 2025.

That fits with talk that the Fed would pursue a "very slowly then all at once" strategy on rate cuts. That has been the Fed's actual behavior since the pandemic, said former Fed Gov. Larry Meyer, in a recent note to clients.

-Greg Robb

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April 11, 2025 07:04 ET (11:04 GMT)

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