By Nick Timiraos

High inflation from tariff increases that risk slowing the economy would create a "challenging environment" for the Federal Reserve that compels the central bank to wait for economic weakness to materialize before entertaining rate cuts, a top Fed official said Friday.

"There's a real recognition that we are likely moving into a period where there may be some difficult trade-offs to make," said Boston Fed President Susan Collins in an interview Friday.

Collins indicated her primary focus was on making sure that a one-time cost shock from higher tariffs didn't lead the public to expect higher inflation to persist. "That would be a concerning environment," she said, adding that it would call for waiting to cut rates.

"It's appropriate for us to have a pretty high bar to be pre-emptive" given concerns that long-term inflation expectations "could become unmoored," she said.

Collins, a voting member of the Fed's rate-setting committee, said she now expected inflation to rise significantly above 3% this year because tariff increases are larger and more broadly based than she previously anticipated. She said businesses have indicated they will pass many of those costs along to end users. She said it was possible firms would spread the increases out over a longer period, making it harder to tell if price hikes were likely to be short-lived.

At the same time, Collins acknowledged policymakers couldn't "rule out a scenario in which there's a more substantial downturn" in economic activity as higher prices destroy demand for goods and services, leading to higher unemployment.

While she said that wasn't her current base-case outlook, if such a scenario unfolded, demand destruction could eventually result in less upward pressure on prices. "And we would certainly respond to a scenario that looked like that," said Collins.

Collins, an economist whose research has specialized in trade and international capital flows, said the recent depreciation of the U.S. dollar against other currencies has been surprising; usually, tariffs have led the currency to strengthen. The weakness could reflect expectations of slower economic growth, she said.

Collins said it was too soon to say whether broader efforts by the Trump administration to order the global trading system might also upend traditional capital-flow dynamics. Investors have retreated from longer-dated U.S. Treasurys in recent days, an unusual dynamic during periods of dollar weakness and worries about economic growth.

"It's very early to see how those demands are shifting, and if there was a decline in demand for U.S. Treasurys, where those would go and how that would unfold," she said.

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(END) Dow Jones Newswires

April 11, 2025 13:44 ET (17:44 GMT)

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