Boston Fed President Susan Collins stated that tariffs may elevate core inflation above 3% this year, complicating the Federal Reserve’s policy rate adjustments. Renewed price pressures could delay potential rate cuts, despite indications that there may still be room for rate reductions.
Collins emphasised the need for stable inflation expectations amid a challenging economic environment. She noted the uncertainty from trade policies is clouds the economic outlook, leading to potential upside inflation risks and downside growth risks. The Fed remains positioned to manage inflation pressures while maintaining steady rates amid tighter financial conditions.
In light of Collins’s remarks, we see added friction introduced into the pricing of forward rate bets due to tariff-related uncertainty. Inflationary currents driven by policy shifts, especially those that affect the cost of imported goods, have a way of pushing expectations out of sync with prior trajectories. If core inflation floats above 3% for a sustained period, as she suggests is likely, then newer positions anticipating a near-term shift in the Federal Reserve’s rate stance begin to look misaligned.
Complexity in Monetary Policy Decisions
The broader point Collins makes — that monetary policy decisions are becoming more complex — should give anyone trading volatility a moment’s pause. The policy path is no longer merely reactive to inflation data but is increasingly shaped by exogenous shocks, such as tariffs and trade frictions. Bids for earlier-than-forecast rate reversals, based on the weaker growth narrative alone, now carry added risk. We’re watching a policy team boxed into a narrower corner, with tools compromised, not by domestic macro readings alone, but by the political cost of international measures.
In practice, any short-term rates positioning now requires high conviction or tight risk management. Holding mid-curve payer spreads or gamma-loaded trades, for example, may carry more drawdown risk than many are currently pricing in. Yes, there has been chatter of improved rate-cut visibility, but Collins’s perspective cuts against that optimism. She underscores that the baseline is becoming less predictable. Any added inflationary pulse from tariffs directly affects headline metrics, and when that seeps into consumer and business sentiment, it doesn’t unwind immediately.
With that context, strategies anchored on rate easing should be treated more carefully. Shorting vol on timing assumptions built from earlier in the year — when expectations leaned more clearly toward slowing — is exposed now. Not only because inflation surprises create sharp repricings, but also because the tolerance thresholds at central banks are far from uniform. We know from recent speeches that some officials are comfortable waiting longer.
Impacts on Market Positioning and Forecasting
Collins signals that the cost of patience isn’t evenly distributed. Inflation above 3% on core metrics amplifies pressure to hold rates longer than futures curves may currently reflect. For us, that means option skew positioning and time decay hedges need to stay flexible. It also cautions against blindly following dovish momentum, particularly where trailing economic data may understate the inflation pass-through still to feed through from trade measures.
She also touches on inflation expectations, and that part warrants attention. Because even if realised inflation spools back down, elevated expectations themselves can act like a vicious feedback loop, embedding pricing power across supply chains. If suppression of volatility has been part of someone’s current exposure, now may be the time to rethink that posture.
Collins plants the idea that while a soft landing remains feasible, the path to it has narrowed. Any attempt to forecast rate cuts without factoring in the transmission from tariffs to price stability now lacks rigour. As far as market positioning goes, we find it increasingly hard to justify lower-for-longer curves in that environment. Rather, there’s room here for conditional bear steepeners or even tactical short duration trades, carefully sized.
Trade risks aren’t abstract — they impact realised inflation with a lag, and that distortion filters through into rate-setting conversations. For those modelling valuation outcomes, ignoring that link is not an option anymore. Given this backdrop, any trend-following in rates markets without sensitivity to inflation linkage could suffer.
