The risk of the Fed raising interest rates is underestimated? Boston Fed official warned before stepping down: if inflation rebounds, rate hikes will return to the agenda.

In the midst of widespread market concerns triggered by the Supreme Court's reversal of President Donald Trump's emergency tariff order, an unexpected perspective on Federal Reserve policy may be overlooked by the market - the possibility of future interest rate hikes. Starting from early last Friday morning, a barrage of information overwhelmed the market - GDP data well below expectations, soaring inflation readings, court rulings, and then Trump escalating the enforcement of higher global tariffs - leaving many investors bewildered as the new week begins. The emergence of a large amount of data and dramatic events may also explain why a sharp warning from a departing regional Fed chair has not received much attention. Raphael Bostic, the Atlanta Fed president who has shifted from a moderate to a hawkish stance after nearly nine years at the helm of the Atlanta Fed, will step down at the end of this month. But his parting shot on Friday highlighted the extent of resistance within the Fed to any further easing - let alone the significant rate cuts that Trump has requested and some Fed officials he appointed seem willing to endorse. Bostic believes that the economy has shown "remarkable resilience" to the trade shocks from last year and is gaining strong tailwinds from spending on artificial intelligence. He argues that a "slight tightening" of policy should be maintained as a result. However, he is highly vigilant of any signs of a resurgence in inflation. "If it starts moving back in the opposite direction - a situation that has not occurred for several years - that would be very worrying, and in my view, raising rates would have to be on the table." For the current market - which has already priced in expectations of nearly 60 basis points of further rate cuts this year, this prospect is undoubtedly sobering; and the latest inflation data released only adds weight to his warning. Although the overall data on the Consumer Price Index (CPI) for January was weak, sparking a frenzy in the bond market, the Fed's closely watched inflation gauge - the "core" Personal Consumption Expenditures (PCE) price index that excludes food and energy prices - has been trending unfavorably. In the background of the unexpected disappointments in the fourth quarter GDP data and the chaos caused by the tariff policy last Friday, the December core PCE price index showed that inflation rose to 3.0%, the highest level in nearly two years - not only exceeding market expectations, but also surpassing the Fed's target by a full percentage point. Furthermore, components of the CPI included in the PCE calculation, such as core goods prices, indicate that the core PCE reading for January is likely to be equally high. Given that the PCE reading also incorporates components of the Producer Price Index (PPI) - such as airfares, medical services, and investment management fees - following the release of the PPI last Friday, the estimated core PCE for January may rise to 3.1%. Tim Duy, a Fed observer at SGH Macro Advisors, wrote: "The latest data is worrisome, and the stickiness of core inflation may be stronger than assumed in the December Summary of Economic Projections (SEP) of the Fed." He also mentioned that Fed Chair Jerome Powell has quietly pushed back expectations of a peak in inflation caused by tariffs to later this year. Has the Fed been fueling inflation? Certainly, there is controversy over the impact of tariffs on inflation so far - but there are indications that the lagging effects of last year's tariff increases on commodity prices are now evident. The Supreme Court's decision to repeal Trump's emergency tariffs could bring some relief in this regard. However, Trump insists on replacing all these tariffs with new ones, which means any relief will be short-lived and the transmission process may even be extended. Bostic and his more hawkish colleagues are concerned that the longer core inflation remains above target, the more likely businesses and the public will assume the Fed is tolerating it, leading to it being entrenched in expectations. Core PCE inflation was below 2% for most of the past decade, but has now been consistently above target for almost five years. The stubborn dovish market mindset heavily relies on an assumption: Kevin Warsh, nominated by Trump, will take over as Fed chair in May and build a stronger case for easing within the Fed. This argument may be based on a series of points: tariffs-related price shocks are temporary, the labor market is weak, and the productivity boost driven by artificial intelligence is imminent - even as trillions of dollars are being invested in physical infrastructure in anticipation of the AI boom. To many, the argument regarding artificial intelligence lacks credibility. This is because historical experience shows that during periods of significant investment in technology, real interest rates tend to rise - a necessary measure to stabilize the economy when overheating occurs, and before any deflationary effects from increased productivity eventually surface. Even dovish Fed Governor Christopher Waller admitted this on Monday. "Economic productivity is higher, growth is faster, and usually real interest rates are higher." There is another tricky question: is the current Fed policy stimulating economic activity and prices? The hawkish Bostic claims that the Fed rate of 3.62% is still slightly tight. But Minneapolis Fed President Neel Kashkari said last week that he believes rates are essentially at a neutral level. And this is crucial. Does the Fed really want to start stimulating the economy at this juncture? Based on different models co-authored by New York Fed President John Williams, the current Fed real interest rates are estimated to be about 50-100 basis points lower than the neutral rate. When Bostic issued his warning, perhaps the "red light" was already flashing. Ignoring it completely at this point would likely be very unwise.