In a speech delivered on Wednesday, Boston Federal Reserve President Susan Collins urged the central bank to exercise patience and a comprehensive assessment of data as it works to combat inflation. While acknowledging recent rate hikes, Collins also hinted at the possibility of further increases if the inflation situation warrants. Her remarks were made during an address to the New England Council, shedding light on the Federal Reserve’s current stance on monetary policy.
In her address, Collins emphasized the importance of patience during this phase of the policy cycle, highlighting the need for holistic data assessment. She stated, “This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course.” This statement came in the wake of the Federal Reserve’s 11th interest rate hike since March 2022, which was implemented in July and is expected to be followed by another later in the year.
The upcoming Federal Reserve policy meeting scheduled for September 19-20 is anticipated to maintain the current interest rate range of 5.25% to 5.5%. This decision aims to ensure that inflation data continues to exhibit a cooling trend. As the Federal Reserve approaches the final leg of its quest to bring inflation down to the 2% target, Collins argued that exercising patience allows for a better differentiation between “signal” and “noise” in data analysis. Additionally, it permits the central bank to manage risks while higher interest rates continue to have an impact on the economy.
*However, Collins cautioned that further rate hikes may still be on the table. She noted, “While we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”*
Collins acknowledged positive developments in the inflation situation but emphasized that strong demand persistently outstripping supply in a stronger-than-expected economy necessitates a cautious approach. She argued that it is too early to interpret recent improvements as a conclusive sign that inflation is firmly on its way back to the 2% target. In fact, core inflation, which excludes volatile food and energy prices, remains at approximately 4%, double the Federal Reserve’s target.
Collins further predicted that the impact of rate hikes would become more apparent in the near future. She pointed out that these hikes have occurred in the backdrop of a robust economy, characterized by strong household and corporate balance sheets. This situation allowed businesses and consumers to utilize their savings and take advantage of previously low rates, shielding them from the impact of the Federal Reserve’s higher rates.
However, as loans mature, savings diminish, and businesses and consumers seek to refinance, Collins anticipates that tighter credit conditions will take effect. This, in turn, could lower demand, leading to a reduction in economic growth and prices.
In late August during an interview, she emphasized the likelihood of the Federal Reserve maintaining elevated rates for an extended period, even if another rate hike is not implemented 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 remarked on August 24.
In her most recent address, the Boston Federal Reserve President concluded by stressing the importance of carefully balancing the risk of prolonged inflation against the risk of overly restrictive monetary policy. She advocated for a patient and deliberate approach to policymaking, allowing sufficient time to evaluate the impact of previous policy actions before taking further steps.
As the Federal Reserve continues to navigate the complex path of inflation control, Susan Collins’ insights shed light on the central bank’s cautious and data-driven approach, emphasizing the importance of balancing economic stability and inflation control.
Source: Yahoo Finance
