A surprising perspective on Federal Reserve policy may be overlooked by markets amid widespread anxiety following the U.S. Supreme Court's repeal of former President Donald Trump's emergency tariff authority—future interest rate increases cannot be entirely ruled out. Starting early last Friday, a cascade of developments—disappointing GDP figures, hot inflation readings, the court ruling, and Trump's push for higher global tariffs—left many investors disoriented as the new week began. The flood of data and dramatic events may explain why a sharp warning from an outgoing regional Fed president failed to attract significant attention.

Atlanta Fed President Raphael Bostic, who shifted from a centrist to a more hawkish stance during his nearly nine-year tenure, is set to step down at the end of this month. However, his parting remarks last Friday underscored the depth of resistance within the Fed against further monetary easing—let alone the substantial rate cuts demanded by Trump and seemingly endorsed by some Fed officials he appointed.

Bostic argued that the economy has demonstrated "remarkable resilience" to last year's trade shocks and is benefiting from strong tailwinds generated by artificial intelligence spending. Consequently, he believes that "slightly restrictive" policy should remain in place. Yet, he remains highly vigilant against any signs of inflation resurgence. "If it starts moving in the opposite direction again—something we haven't seen in years—that would be very concerning, and for me, that would put rate hikes back on the table," he stated.

For current markets, which have priced in nearly 60 basis points of additional rate cuts this year, this outlook serves as a sobering reality check. Recent inflation data further lends weight to his warning. Although the headline Consumer Price Index (CPI) for January appeared weak, initially sparking a bond market rally, the core inflation measure closely watched by the Fed—the Personal Consumption Expenditures (PCE) price index excluding food and energy—has been trending unfavorably.

Somewhat obscured by unexpectedly soft fourth-quarter GDP data and the chaos stemming from last Friday's tariff developments, the core PCE price index for December showed inflation reaccelerating to 3.0% for the first time in nearly two years. This figure not only exceeded market expectations but also stood a full percentage point above the Fed's target.

Moreover, CPI components used in PCE calculations, such as core goods prices, suggest the January core PCE reading could be at least as high. Given that PCE also incorporates elements from the Producer Price Index (PPI)—including airfares, medical services, and portfolio management fees—estimates for January core PCE potentially rose to 3.1% following last Friday's PPI release.

Tim Duy, a Fed watcher at SGH Macro Advisors, noted, "The latest data is concerning and suggests core inflation persistence may be stronger than assumed in December's SEP (Summary of Economic Projections)." He also mentioned that Fed Chair Jerome Powell has quietly pushed back expectations for a tariff-induced inflation peak to later this year.

Could the Fed already be fueling inflation? The impact of tariffs on inflation so far remains debated, but there are indications that last year's tariff increases are having a delayed "pass-through" effect on goods prices. The Supreme Court's decision to overturn Trump's emergency tariffs could have provided some relief in this regard. However, Trump's insistence on replacing all tariffs with new ones implies any relief would be temporary, potentially prolonging the pass-through process.

Bostic and his more hawkish colleagues worry that the longer core inflation remains above target, the more businesses and the public will assume the Fed is tolerating it, thereby embedding it into expectations. After spending much of the previous decade below 2%, core PCE inflation has now remained firmly above target for nearly five years.

Stubbornly dovish market sentiment heavily relies on the assumption that Trump appointee Kevin Warsh, if appointed Fed chair in May, would build a stronger case within the Fed for resuming rate cuts. Arguments may include that tariff-related price shocks are temporary, the labor market is softening, and AI-driven productivity gains are imminent—even as trillions of dollars are being invested in physical infrastructure to support the AI boom.

To many, the AI argument lacks persuasiveness. Historically, periods of significant technology-related investment surges have often been accompanied by rising real interest rates—a necessary measure to stabilize an overheating economy, occurring before any deflationary effects from productivity gains materialize. Even dovish Fed Governor Christopher Waller acknowledged this on Monday, stating, "The more productive and faster-growing the economy, the higher the real interest rate tends to be."

Another thorny issue arises: is current Fed policy already stimulating economic activity and prices? Hawkish Bostic claims the Fed's 3.62% rate remains slightly restrictive. However, Minneapolis Fed President Neel Kashkari suggested last week that he views interest rates as essentially neutral. This distinction is critical. Would the Fed truly want to begin stimulating the economy at this juncture?

Based on alternative models co-authored by New York Fed President John Williams, the current real Fed funds rate is estimated to be about 50-100 basis points below the neutral rate. When Bostic issued his warning, it may have already signaled a "red light." Ignoring it completely at this point would be highly unwise.