Federal Reserve Bank of Boston President Susan Collins expressed a cautious yet realistic optimism regarding the economy, noting that it began 2025 positively. Although inflation has decreased, it remains elevated, and the outlook for both inflation and growth appears less clear.
Collins stated that upcoming tariffs are expected to increase inflation in the short term, raising questions about the duration of this tariff-driven inflation. She pointed out that inflation risks lean towards the upside and supported the Fed’s decision to maintain steady interest rates, anticipating they may do so for an extended period.
Ongoing Market Retrenchment
Additionally, she mentioned that federal layoffs remain minor compared to the overall labour market size. Economic uncertainty is causing businesses to reduce their activities.
What Collins conveyed, with a measured but evident caution, is that while early indicators in the new year are promising, the path ahead is far from certain. Inflation, while having come down from last year’s peak, continues to be uncomfortably high for policymakers. And though progress has been made since the worst of the price shocks, the direction of both inflation and growth now appears muddied. This isn’t a return to panic, but it’s certainly not room for complacency either.
She cited upcoming tariffs as a cause for short-term price pressures. The reasoning is straightforward: when it becomes more expensive to import goods, businesses often pass those costs on to consumers. These new tariffs—once in place—will likely raise inflation figures for a time, potentially masking underlying changes in demand or supply. What remains unclear is how long this upward pressure on prices will persist and whether it will feed into broader pricing behaviour. If businesses or consumers begin to expect higher prices as a norm again, that could be problematic.
Collins also underscored the Federal Reserve’s decision to hold rates steady. The worry here is that if rates were cut too soon, before inflation is genuinely under control, it might undo months of progress. That said, by keeping rates at their current levels—even as borrowing costs tighten economic activity—the Fed risks prolonging the drag on investment and hiring. It’s a delicate equilibrium, and for now the preference is to wait rather than overshoot.
Lingering Caution In Business Trends
On employment, there are hints of resilience. Government job losses were described as relatively modest—a way of saying that while there are weaknesses, they aren’t system-wide. However, the broader theme was one of hesitation. Businesses are beginning to hold back—not cutting aggressively, but pulling back on expansions, scaling down hiring plans, and in some sectors, simply waiting to see what others will do.
We have found this posture to be common in late-cycle periods, when mixed signals abound. When inflation data softens but labour markets still appear tight, and yet capex budgets get trimmed—it tends to suggest an environment in which forward-looking bets have to be very carefully timed.
In the coming weeks, it would be useful to look at the details of CPI releases with tariffs in mind—not just the headline figure, but movement in goods most directly affected by the new trade measures. Likewise, one should watch how corporate earnings commentary lines up with this emerging caution. Are firms still lifting prices, or are they being resisted? Is wage growth quietly cooling beneath the surface?
There might be room for adjustment strategies, especially in assets sensitive to real rates or credit spreads, depending on how sticky inflation proves. Collins’s remarks effectively set a guide: rates are not cutting any time soon, upside surprises in inflation are now more likely than downside, and risk sentiment is softening on the margins. The balance may not have tilted fully—but the weight is shifting.
