Boston Fed’s Collins: More rate hikes are possible as Fed proceeds with ‘patience’
By Jennifer Schonberger, Yahoo Finance
Boston Federal Reserve President Susan Collins said Wednesday that the central bank should take its time as it looks to bring inflation down, but warned further rate hikes could be warranted.
“This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course,” Collins said in a speech at the New England Council.
In July Fed officials raised interest rates for the 11th time since March 2022 in what may be the first of two rate hikes that officials have penciled in for the remainder of the year.
The Fed will hold its next policy meeting on Sept. 19-20, when officials are expected to take a breather and hold rates steady in the range of 5.25%-5.5% to make sure inflation data continues to show cooling.
As the Fed enters the proverbial last mile of continuing to bring inflation down to its 2% target, Collins said patience will allow the central bank time to better separate “signal” from “noise” as officials analyze the data as well as balancing risks while higher interest rates continue to work through the economy.
Though Collins warned more hikes are possible. “While we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data,” she said.
Collins cited promising developments on the inflation front, but said that given demand continues to outpace supply with a stronger-than-expected economy, she feels it’s too early to take the recent improvements as evidence that inflation is on a sustained path back to 2%.
Strong demand relative to supply has been a key factor driving higher inflation. While inflation has dropped from a high of just over 9% to closer to 3%, on a core basis — stripping out volatile food and energy prices — inflation is still running around 4% — twice the Fed’s inflation target.
Collins says she expects the Fed’s rate hikes to start biting more soon. She noted that the rate hikes have occurred during a strong economy with strong household and corporate balance sheets, allowing businesses and consumers to tap savings and rates that were previously low, insulating them from the Fed’s higher rates.
As loans come due and savings run dry and businesses and consumers look to refinance, Collins expects tighter credit will be felt, lowering demand, and thus growth and prices.
Collins’ comments Wednesday echo what she told Yahoo Finance in Jackson Hole in late August, when she said the central bank will likely need to keep rates elevated for an extended period even if it does decide against another increase in the coming months.
“We may need additional increments, and we may be very near a place where we can hold for a substantial amount of time,” she said on Aug. 24.
In her speech today Collins said “the risk of inflation staying higher for longer must now be weighed against the risk that an overly restrictive stance of monetary policy will lead to a greater slowdown in activity than is needed to restore price stability.”
“This context calls for a patient and careful, but deliberate, approach to policy, allowing time to assess the effects of policy actions to date, and then acting appropriately.”