By Steven K. Beckner
(MaceNews) – Boston Federal Reserve Bank President Susan Collins is willing to support an increase in short-term interest rates if forthcoming reports on inflation don’t show it coming down as she hopes, comments released by the bank Tuesday reveal.
Without evidence of moderating inflation, she believes “it will be appropriate to tighten policy soon.”
Collins made a number of visits in New Hampshire last Thursday, talking about the economy and monetary policy in that part of her First Federal Reserve District, and she told business leaders and others there that she agrees with other Fed officials who have been foreseeing the potential need for anti-inflationary rate hikes.
In her New Hampshire comments, belatedly summarized in an essay titled “Perspectives on the Economy.” the Boston Fed chief downplayed risks to economic activity and employment and emphasized upside risks to inflation and inflation expectations.
Without some improvement in the latter area, rate hikes will be needed, she asserted, ostensibly with an eye toward the Sept. 15-16 meeting of the Fed’s rate-setting Federal Open Market Committee. Collins is not a voting FOMC member until 2028.
There was considerable support for higher interest rates at the late July FOMC meeting, as minutes of the Fed’s policy making body’s deliberations released last Wednesday confirmed. Aside from the three Federal Reserve Bank Presidents who dissented in favor of an immediate rate hike, “many participants assessed that policy tightening would likely be necessary if inflation did not decline.”
Last Thursday, while Collins was roaming New England, St. Louis Fed President Alberto Musalem said inflation needs to be brought down to 2% “over the next 18 months” and said “earlier, more gradual interest rate increases are preferable, better, less disruptive than later, potentially larger, potentially more abrupt increases.” Currently, he said the funds rate is is not restrictive, but “neutral or accommodative,”
Previously, others, including Governor Lisa Cook, Philadelphia Fed President Anna Paulson and Kansas City Fed President Jeffrey Schmid had conditionally backed higher rates.
Ahead of Fed Chairman Kevin Warsh’s keynote address to the Kansas City Fed’s annual Jackson Hole symposium, Collins joined that hawkish coalition.
She said she was “comfortable” with the FOMC’s July 29 FOMC decision to keep the federal funds rate in a 3.5% to 3.75% range, and she said that “for now, this mildly restrictive policy stance should leave the Committee well positioned to address evolving economic conditions and return inflation to target in a reasonable amount of time.”
However, Collins added, “maintaining the current federal funds rate target range will require continued evidence that inflation is indeed coming down.”
“Without such evidence, it will be more difficult to rule out other inflationary forces being at play – including the possibility that firms’ price-setting behavior has become inconsistent with 2% inflation,” she continued, adding, “Should evidence of sustained inflation progress not materialize, I believe it will be appropriate to tighten policy soon to ensure we deliver price stability in a reasonable time frame.”
Looking first at the “maximum employment” side of the Fed’s “dual mandate,” Collins began by observing that “near-trend” economic growth has left labor market conditions “broadly consistent with maximum or full employment.”
“Labor market conditions have been stable, with the unemployment rate just above 4% and
fluctuating within a narrow range since mid-2024,” she noted, adding that labor market conditions are “broadly balanced.”
With the job market apparently in decent shape, Collins said she is “particularly focused on inflation, which has been running above the FOMC’s 2% target for over five years.” So she said that “in the coming months, (she) will be looking for evidence that inflation is durably returning to 2%….”
She allowed for the possibility that inflation could moderate as hoped. Indeed, she said that is her “modal, or most likely, outlook for the remainder of this year” – based on “seeing limited additional tariff increases and some degree of reopening of the Strait of Hormuz .…”
“In this modal scenario, the pass-through to prices of previous tariffs should largely have played out by now, and the impact of high energy costs should begin to wane,” she added.
Collins cited three factors that “should help with the gradual disinflation process”:
– 1. a presumed lack of pressure on prices from labor costs;
– 2. “mildly mildly restrictive monetary policy, together with the recent rise in longer-term interest rates,,,;, and
– 3. “solid productivity growth” putting “some downward pressure on prices.”
But she warned that “less benign scenarios are also quite plausible.”
“In particular, there are upside risks to inflation from both additional adverse supply shocks, and a stronger-than-expected pace of economic activity,” Collins said, noting that “the AI build-out appears to be putting upward pressure on core goods inflation.”
Collins called the June and July inflation reports “mildly encouraging,” but said “it remains to be seen whether the recent improvements will be sustained.”
To determine whether tighter monetary policy is needed, she said she will be focusing on such things as “the extent to which ongoing productivity growth can offset inflationary pressures from demand or supply sources….; “new adverse supply shocks, or an acceleration in demand, (which) could outweigh such potentially favorable dynamics,” such as “the continued closure of the Strait of Hormuz,” and the risk that “another rise in inflation could lead longer-term inflation expectations to unmoor.”