Still too-high inflation and an uncertain economic outlook mean the Federal Reserve should take a patient and deliberate approach to changing interest rates, Fed Bank of Boston President Susan Collins said on Wednesday. She is the latest central bank official to emphasize that interest rates will be on hold for some time.
Last week, the Federal Open Market Committee voted unanimously to keep the federal-funds rate at a target range of 5.25% to 5.50%—where it has been since July 2023.
“While realistic about the risks and uncertainties, I remain optimistic that [a return to 2% annual inflation] can be accomplished in a reasonable amount of time and with a labor market that remains healthy,” Collins said on Wednesday, speaking at the Massachusetts Institute of Technology’s Sloan School of Management. “But there is significant uncertainty around that outlook, and the recent data lead me to believe this will take more time than previously thought.”
Collins has served as president of the Boston Fed since 2022. She will next be a voting member of the FOMC in 2025.
Growth in the personal consumption expenditures price index—the Fed’s preferred inflation measure—had been decelerating in the second half of 2023, only for progress to stall so far this year. The March year-over-year change in the headline PCE price index was 2.7%, after increases of 2.4% in January and 2.5% in February. The Fed has a 2% annual inflation target.
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A lot of that progress on reducing inflation—paired with solid economic growth—last year came thanks to improvements on the supply side, Collins said, pointing to an increase in the labor supply and worker productivity and the normalization of supply chains after the pandemic.
“While economic activity has remained relatively robust [so far in 2024] and the labor market healthy with signs of coming into better balance, we have not, unfortunately, seen further disinflationary progress,” Collins said. “But unevenness in the disinflation process is to be expected. I am not surprised to see some less welcome news after such a string of positive inflation developments.”
Further progress on reducing inflation may have to come from the demand side, Collins said, particularly in non-housing services, which is closely tied to wage growth. That could necessitate slower economic growth and an extended period of higher interest rates.
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“In this context, the role of monetary policy is to restrain demand, to help facilitate the realignment process,” Collins said. “The recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward 2%.”
Collins will be looking for lower inflation readings, well-anchored inflation expectations, and a better alignment of supply and demand in the U.S. labor market before considering voting in favor of lowering interest rates.
The next meeting of the FOMC will be June 11-12. The interest-rate futures market on Wednesday implied a less than 10% likelihood of a quarter-point reduction in the fed-funds rate target at the meeting. The market was pricing in greater-than-even odds of a cut in September.
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“The unusual nature of this cycle, the continued high degree of uncertainty, and still-elevated inflation all highlight the importance of patience, analysis, and a bit of humility,” Collins said.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com