Rajan suggests that a central bank's reluctance to aggressively fight inflation may stem from a fear of being blamed for a potential recession. In a politically charged environment, the institutional risk of becoming the 'fall guy' can subtly influence policy, leading to a more dovish stance than economic data alone would suggest.

Increasing political influence, including presidential pressure and politically-aligned board appointments, is compromising the Federal Reserve's independence. This suggests future monetary policy may be more dovish than economic data warrants, as the Fed is pushed to prioritize short-term growth ahead of elections.

The Federal Reserve Chair has explicitly stated that current inflation above the target is driven by tariffs on goods. This is being masked by disinflation in the services sector, suggesting that underlying, broad-based inflationary pressures in the economy are actually quite weak.

The primary economic risk for the next year is not recession but overheating. A dovish shift at the Federal Reserve, potentially from a new Trump appointee, combined with loose fiscal policy and tariffs, could accelerate inflation to 4%, dislodge expectations, and spike long-term yields.

While tariffs were a dominant market concern previously, they have fallen in priority for investors. The primary focus has shifted to more systemic risks, including the potential for fiscal dominance over the Federal Reserve and the long-term trend of "de-dollarization" among global institutions.

The Fed expects inflation from tariffs to be a temporary phenomenon, peaking in Q1 before subsiding. This view allows policymakers to "look through" the temporary price spike and focus on what they see as a more pressing risk: a cooling labor market. This trade-off is described as the "cost of providing insurance to the labor market."

Robert Kaplan cautions against dismissing inflation risks. Many businesses are still absorbing tariff costs or working through pre-tariff inventory. He believes the full price impact will be passed on to consumers in 2026, potentially keeping inflation stickier than markets currently expect.

The economic impact of tariffs is not an immediate, one-time price adjustment. Instead, Boston Fed President Collins characterizes it as a "long one-off" process where the full effect can take months or even a year to filter through the economy. This prolonged adjustment period extends uncertainty and complicates inflation forecasting.

The Federal Reserve can tolerate inflation running above its 2% target as long as long-term inflation expectations remain anchored. This is the critical variable that gives them policy flexibility. The market's belief in the Fed's long-term credibility is what matters most.