By Michael S. Derby
NEW YORK (Reuters) – Federal Reserve Bank of Boston President Susan Collins said Wednesday while the odds of the economy escaping a recession have grown, it’s possible the central bank is not done with interest rate hikes aimed at bringing inflation back to its target.
“I expect we’ll need to hold rates at restrictive levels for some time – until we see evidence that inflation is on a sustained path back to 2%,” Collins said in a speech text. “And while we are likely near, and could be at, the peak for policy rates, further tightening could be warranted depending on incoming information,” she said.
With the Fed having raised rates from near zero levels in the spring of 2022 to the current 5.25%-5.5% range, Collins, who does not have a vote on the rate setting Federal Open Market Committee this year, said now is a time for the Fed to take its time to decide what its next move will be.
“Patience will give us time to better separate ‘signal’ from ‘noise’ in the data and to balance risks, as the effects of tighter policy continue to work through the economy,” Collins said. That the Fed has shifted to this stance reflects the need to balance out risks of inflation remaining too high against slowing the economy too much, the official said.
Collins’ remarks came after the release of meeting minutes from the Fed’s September gathering. Then, officials held rates steady but kept the option alive of raising them again even as inflation pressures have been cooling. In recent comments, a slew of officials have cited rising bond market yields, which should create restraint on the economy, as a factor that may allow them to call it a day on their rate hike cycle.
In her speech, Collins said it appears the savings levels are starting to dry up and because of that the economy is likely to become more responsive to changes in monetary policy, suggesting Fed policy is likely to weigh on the data more than it has.
Collins said the economy has been surprisingly resilient in the face of Fed action and she believes the path to achieving a soft landing has grown.
“I continue to be realistic about the economic uncertainties and risks, but optimistic that price stability can be restored with an orderly slowdown in activity and only a modest increase in the unemployment rate,” Collins said.
(Reporting by Michael S. Derby; editing by Diane Craft)
