Federal Reserve Bank of Boston President Susan Collins stated that despite current challenges, financial markets are functioning effectively. She identified solid economic conditions at the start of the first quarter.
Collins mentioned that tariffs are likely to increase inflation pressures and indicated that the current tariffs are set very high. She expressed concern over the impact of China trade issues on the economy, suggesting that these factors create uncertainty in investment decisions.
Inflation Expectations
Regarding inflation, Collins expects it to exceed 3% this year due to tariffs and sees mixed indicators for long-term inflation expectations. She noted a modal view of slower growth rather than a downturn, emphasising the need for the Federal Reserve to maintain steady policies.
When Collins points to “solid economic conditions,” we can interpret that as an assessment that the underlying demand in the economy remains resilient. Consumption and employment likely remain stable enough to support the argument that we are not heading into a contraction, though we may slow down. This matters because a steady macro backdrop limits expectations for a sharp pivot in monetary policy, even in the face of rising trade tensions.
Her remarks about higher tariffs fostering stronger inflationary pressure directly relate to cost-push dynamics. Typically, this kind of inflation doesn’t respond swiftly to interest rate shifts, so central banks tend to proceed more judiciously. Whereas demand-led inflation may be dampened with higher rates, cost-based increases—especially those stemming from policy choices like trade barriers—may prove stickier. Collins even flags that tariffs are “set very high,” which could hint that future pricing and wage expectations become untethered from the 2% inflation target—a development that monetary authorities cannot ignore without risking credibility.
She described long-term inflation expectations as delivering “mixed” signals. That implies a wide distribution of views in bond markets, perhaps with some investors still anticipating rate cuts by the end of the year while others push back their timelines. For traders, this matters more than it may initially appear. Disagreement in expectations often leads to more fluctuations in forward rate agreements or interest rate swaps, particularly if fresh data begins to reinforce one narrative over another.
Expectations of Growth
Notably, Collins leans away from predicting a sharp contraction, instead suggesting that growth may simply decelerate. A “modal view of slower growth” means that continued pace, while softer, remains the most likely base case. From a positioning standpoint, we might read this as an endorsement for relative stability in short-term rate markets, so long as additional shocks don’t materialise. That also suggests we shouldn’t get ahead of ourselves pricing in steep cuts.
Her stress on policy steadiness underlines that despite worrying indicators, especially from global trade fronts, sudden shifts in rate expectations are unlikely without a broader deterioration. This aligns with what we’ve seen from implied volatility metrics in interest rate derivatives, which have come in from recent highs but are still sensitive to data surprises.
Now, given the backdrop Collins outlines—one that involves strong inflation drivers from non-monetary causes and yet a stable core economy—it seems prudent to stay glued to trade-related headlines. Any escalation, particularly involving China, could compound inflation risks. These wouldn’t just influence realised inflation, but also the term structure of inflation swaps, breakevens, and possibly options skews on rate futures.
From our perspective, the next few weeks may offer clarity, particularly with data releases that reflect consumer pricing and trade volumes. If commitments to higher tariffs persist and inflation prints do not slide toward target, pricing in a longer period of restrictive rates could become justified. That doesn’t necessarily translate to immediate front-end action, but it may widen spreads in mid-curve structures—an area we’ll be monitoring closely.
So, instead of bracing for reversals, the market might be better served by preparing for entrenchment. Collins appears to suggest that a steady hand is preferred, even in the face of mixed signals. This supports strategies favouring carry over convexity, at least for the near term. Optionality may still have a role, particularly around key event risks or policy statements, but the directional bias seems limited until clearer evidence emerges.
