Fed’s Collins urges prompt action amid tariff-driven inflation risks through late 2025, signals possible rate cuts

In an era of persistent economic fog, central banks face a stark choice: paralysis in the face of uncertainty or decisive action to steer the ship. Recent commentary from Federal Reserve officials underscores a pivotal shift in monetary policy thinking, emphasising that waiting for complete clarity on risks such as tariffs, geopolitical tensions, and fiscal shifts could prove costly. This approach, particularly relevant as 2025 unfolds, suggests policymakers are gearing up for a more proactive stance, balancing inflation control with employment goals amid a landscape riddled with unknowns.

The Imperative of Acting Amid Ambiguity

The Federal Reserve’s mandate demands vigilance on price stability and maximum employment, yet the path ahead is obscured by multifaceted uncertainties. Trade policies, including potential tariffs, loom large, with projections indicating they could elevate inflation in the latter half of 2025 before easing in 2026. Boston Fed President Susan Collins has highlighted the resilience of current economic conditions, noting that while inflation risks persist, the labour market remains robust, with unemployment low and job gains steady. However, she advocates for a patient yet attentive policy framework, one that does not defer decisions until all variables align perfectly.

This perspective aligns with broader Fed sentiment. For instance, in a June 2025 speech, Collins described the economy as solid overall, supporting the decision to maintain the federal funds rate at 4¼ to 4½ percent. Yet, she stressed the need for adaptability, acknowledging that significant uncertainty—especially around trade—clouds the outlook. Analyst models, such as those from Bloomberg Economics, forecast that tariffs could depress growth in the near term while pushing inflation higher, potentially necessitating fewer rate cuts than previously anticipated. This creates a delicate balancing act: too much hesitation might allow inflationary pressures to entrench, while premature easing could undermine hard-won stability.

Historical Context and Lessons Learned

History offers cautionary tales. During the 2010s, the Fed grappled with post-financial crisis uncertainties, often opting for gradualism that some critics argue prolonged economic sluggishness. Fast-forward to 2022–2023, when inflation surged amid supply chain disruptions and energy shocks; the central bank’s initial dovish stance gave way to aggressive hikes, demonstrating the perils of waiting too long. In 2025, with core PCE inflation projected at around 2.5% for Q4/Q4 by some FOMC participants, the risk of stagflationary undertones—higher prices coupled with moderating growth—echoes these past episodes.

Collins’s remarks in various forums, including a July 2025 interview, reinforce this: a solid economy affords time for assessment, but not indefinite delay. She noted that healthy balance sheets among businesses and households might mitigate tariff impacts, suggesting the overall hit to growth could be more modest than feared. This optimism is tempered by realism; as she put it in a May 2024 address, uncertainty demands patience but also methodical evaluation of data, avoiding overreactions to single releases.

Implications for Investors and Markets

For investors, this policy ethos implies a volatile but navigable terrain. Fixed-income markets, sensitive to rate expectations, have priced in gradual adjustments, with the Fed’s dot plots from December 2024 initially signalling two cuts for 2025, down from four, reflecting upward revisions in inflation forecasts. Reuters reported in April 2025 that Collins viewed tariffs as almost certainly inflationary in the short term, potentially depressing growth—a view that could lead to a “steady Fed” approach, holding rates amid rising risks.

Equity markets, meanwhile, must contend with sector-specific fallout. Industries exposed to international trade, such as manufacturing and agriculture, face headwinds from higher costs, while consumer staples might see spending dampened by reduced purchasing power. Analyst sentiment, as gauged by sources like the Wall Street Journal, indicates openness to rate cuts as soon as September 2025 if labour data softens further, with Collins signalling that worsening employment conditions could tip the scales over persistent inflation risks.

• Inflation Dynamics: Expectations remain well-anchored, per Fed assessments, but tariffs could drive near-term spikes, with models suggesting a peak in late 2025 before a 2026 cooldown.
• Labour Market Vigilance: Unemployment hovers at pre-pandemic lows, but modest deceleration signals caution; Fed officials like Collins emphasise monitoring for signs of weakness.
• Policy Flexibility: No pre-set path for rates, with additional easing possible if data warrants, but patience is key to avoid uneven progress.

Dry humour aside, it’s as if the Fed is playing economic chess in a room full of smoke—making moves based on the board’s faint outline rather than waiting for the air to clear. This strategy mitigates the risk of policy errors that have historically amplified downturns.

Forecasting the Path Ahead

Looking forward, analyst-led forecasts from institutions like the Federal Reserve Bank of Boston project a resilient economy, with GDP growth holding steady despite headwinds. In a January 2025 assessment, Collins reflected on the need for humility amid uncertainty, advocating deeper understanding of dynamics to inform decisions. Bloomberg’s July 2025 analysis echoes this, suggesting the Fed’s tools—rate adjustments and balance sheet management—stand ready to stabilise if liquidity issues arise, even as current conditions appear stable.

Sentiment from credible sources, such as Reuters and the Wall Street Journal, marks a cautious optimism: while inflation is expected to rise through year-end 2025, easing in 2026 could pave the way for normalisation. FXStreet reports highlight Fed officials’ warnings on policy uncertainty, underscoring that transmission mechanisms remain foggy, prompting holistic data evaluation.

Strategic Considerations for Portfolios

Investors would do well to diversify across assets resilient to inflation shocks, such as commodities or inflation-linked bonds, while eyeing opportunities in sectors buoyed by domestic strength. The Fed’s emphasis on not waiting for certainty implies that market pricing will increasingly reflect scenario-based outcomes, rewarding those who anticipate rather than react.

In summary, the evolving monetary policy narrative in 2025 champions action over inertia, recognising that uncertainty is a constant companion. By maintaining a careful, data-driven approach, the Fed aims to sustain economic health, offering investors a framework to navigate the haze with confidence.

References

• Boston Fed. (2024, May). Reflections on uncertainty and patience in monetary policymaking. https://www.bostonfed.org/news-and-events/speeches/2024/reflections-on-uncertainty-and-patience-in-monetary-policymaking.aspx
• Boston Fed. (2024, September). Perspectives on the economy and policy. https://www.bostonfed.org/news-and-events/speeches/2024/perspectives-on-the-economy-and-policy.aspx
• Boston Fed. (2025, January). Assessing the economy as the new year begins. https://www.bostonfed.org/news-and-events/speeches/2025/assessing-economy-as-new-year-begins.aspx
• Boston Fed. (2025, June). Economic perspectives in MA. https://www.bostonfed.org/news-and-events/speeches/2025/economic-perspectives-in-ma.aspx
• Boston Fed. (n.d.). Susan M. Collins. https://www.bostonfed.org/people/bank/susan-m-collins.aspx
• Federal Reserve Bank of St. Louis. (n.d.). Statements and speeches: Susan M. Collins. https://fraser.stlouisfed.org/title/statements-speeches-susan-m-collins-9016
• Reuters. (2025, April 10). Fed’s Collins sees steady Fed as tariffs push up inflation risks. https://www.reuters.com/business/feds-collins-sees-steady-fed-tariffs-push-up-inflation-risks-2025-04-10/
• Reuters. (2025, June 25). Fed’s Collins says rate cuts later this year are possible. https://www.reuters.com/sustainability/boards-policy-regulation/feds-collins-says-rate-cuts-later-this-year-are-possible-2025-06-25/
• Reuters. (2025, July 15). Fed’s Collins urges patience on rates, says tariff hit may be more modest. https://www.reuters.com/business/feds-collins-urges-patience-rates-says-tariff-hit-may-be-more-modest-2025-07-15/
• Bloomberg. (2025, July 15). Collins says solid economy gives Fed time to assess next move. https://www.bloomberg.com/news/articles/2025-07-15/collins-says-solid-economy-gives-fed-time-to-assess-next-move
• FXStreet. (2025, August 6). Fed’s Collins and Cook caution about the risks of policy uncertainty. https://www.fxstreet.com/news/feds-collins-and-cook-caution-about-the-risks-of-policy-uncertainty-202508061849
• FXStreet. (2025, August 21). Fed’s Collins signals openness to rate cut as soon as next month. https://www.fxstreet.com/news/feds-collins-signals-openness-to-rate-cut-as-soon-as-next-month-202508212254
• VT Markets. (2025). Collins emphasised the importance of understanding uncertainty’s effects on the economy and investments. https://vtmarkets.com/live-updates/collins-emphasised-the-importance-of-understanding-uncertaintys-effects-on-the-economy-and-investments
• BizToc. (2025). https://biztoc.com/x/31f1995d69a4cf8b
• X (formerly Twitter). Various market commentary from MacroEdge, Nick Timiraos, Holger Zschaepitz, Zerohedge, David Rosenberg, Scott Bauer, RADEX MARKETS, Neil Sethi, iNewsroom, TENET RESEARCH.