Boston Fed's Collins sees more proof of disinflation to keep rates unchanged

The US Federal Reserve will likely need to increase interest rates in the short term unless forthcoming data demonstrates a continued decrease in inflation. This assessment was made by Boston Fed President Susan Collins on Tuesday (August 25) in an interview posted on the Boston Fed website. Currently, the Fed's base policy rate sits between 3.5% and 3.75%, a stagnant level since December, as officials await signs of inflation easing.

Collins stated that the policy rate, assuming her base case outlook remains accurate, will persistently suppress prices and contribute to a "gradual disinflation" process. This disinflation is further bolstered by the recent surge in longer-term bond yields and other contributing factors. However, if evidence of persistent inflation fails to materialize, Collins believes it would be prudent to raise policy rates promptly to ensure the achievement of price stability within a reasonable timeframe.

Collins noted that concerns about high prices are widespread in her interactions with stakeholders across New England. Economists polled by Reuters anticipate that new inflation data released on Wednesday will indicate that the Personal Consumption Expenditures (PCE) price index, excluding food and energy, rose by 3.3% annually in July, a figure unchanged from the prior month and significantly above the Fed's 2% target.

The core PCE, serving as an indicator of future headline inflation, has steadily increased since last year, fueled by factors such as Trump-era import tariffs, higher oil prices due to the Iran conflict, and the substantial investments in artificial intelligence. Despite her belief that a rate hike may still occur, Collins expressed concern that the Fed cannot afford to wait indefinitely, as prolonged failure to meet the inflation objective could alter consumer expectations, thereby making the inflation goal more challenging to attain.