Fed's Collins says it is clear tariffs will drive inflation up near term

By Michael S. Derby

(Reuters) -Federal Reserve Bank of Boston President Susan Collins said on Thursday that Trump administration tariffs will drive up U.S. inflation but it is unclear how persistent that upward pressure will be.

"It looks inevitable that tariffs are going to increase inflation in the near term" and it seems more likely than not right now the jump will be short-lived, she said in an appearance in Boston.

But "there are risks" the higher price pressures could prove more enduring, she noted, and the details and reactions of those targeted by the tariffs matter a lot in determining how much prices will be affected.

Collins also said she fully supported the Fed's decision last week to hold rates steady. And with upside risks to inflation and broader uncertainty weighing on activity, it means that when the U.S. central bank sets the federal funds rate, "I would, looking forward, expect that holding it steady for a longer time is likely to be appropriate." She added the Fed should show "active patience" and stand ready to be flexible.

Collins was speaking publicly for the first time since the most recent gathering of the rate-setting Federal Open Market Committee. Last week the FOMC kept its interest rate target steady between 4.25% and 4.5%, warning that uncertainty around the outlook had risen.

Forecasts released by the Fed also included higher near-term inflation relative to December estimates, although the projections appeared to suggest price pressures will start to ease again in 2026.

U.S. President Donald Trump is pushing an aggressive policy against America's main trading partners that economists broadly agree will drive up inflation while weighing on growth.

Trump's latest salvo, announced on Wednesday, targets auto imports with 25% tariffs, which many experts believe will drive up prices aggressively and disrupt a critical economic sector. Capital Economics said in a note on Wednesday that car price increases tied to the tariffs "could make new vehicles something of a luxury item."

In her appearance, Collins said the economy started the year on a strong note and the question now is whether that will continue to endure amid all the uncertainty.

"The economy came into 2025 in a good place overall" and "I am cautiously, realistically optimistic for a variety of reasons" as underlying economic trends remain solid, Collins said.

As for the impact of Trump's policy changes, it is unclear because it is still "early days," she said.

"There's a lot of strength and resilience and there is certainly the possibility of adverse supply and demand considerations that are important to watch for."

(Reporting by Michael S. Derby; Editing by Chris Reese and Richard Chang)