MNI: Collins Says Fed Likely Needs Lower Growth In Demand

Boston Fed President Susan Collins said Wednesday stronger-than-anticipated inflation and economic activity suggest achieving the Federal Reserve’s dual mandate goals may take longer than previously thought, and will likely require lower growth in demand.

"I’m committed to bringing inflation sustainably back to our 2% target," she said in her prepared remarks at MIT. "I remain optimistic that this can be accomplished in a reasonable amount of time and with a labor market that remains healthy."

"But there is significant uncertainty around that outlook, and the recent data lead me to believe this will take more time than previously thought," she said, adding there is no pre-set path for policy. "It requires decisions based on a methodical, holistic assessment of wide-ranging information."

The central bank's current policy stance is moderately restrictive, Collins said, and is appropriate for balancing the current two-sided risks of easing too soon or holding too
long. (See: MNI INTERVIEW: Fed Rate Cuts Timeline Pushed Back-Reinhart)

In assessing whether conditions are consistent with a potential easing of interest rates, Collins highlighted four areas of particular focus. She will be looking for short- and longer-term inflation expectations remaining well anchored; further sustained disinflation, especially in the components that remain most elevated; evidence that wages
continue to evolve in a way that is consistent with price stability; and ongoing indications that labor markets are moderating in an orderly way that better aligns labor supply and demand.

LOWER DEMAND

The Fed cannot necessarily count on continued supply side progress to reduce inflation amid strong economic activity, she said. "In particular, the core goods sector is unlikely to contribute much more to the disinflation process, though it is possible that some previous improvements are not yet fully reflected in prices."

Additional labor supply and productivity gains are highly uncertain, Collins said. New-tenant rent growth has generally returned to pre-pandemic levels but rents of existing tenants are still catching up, and continuing to put pressure on housing inflation.

"Therefore, progress on inflation will very likely require lower growth in demand, particularly to facilitate further slowing of core non-housing services inflation."

Labor productivity trends have been favorable and should ultimately be reflected in higher compensation for workers, she said. In this context, there is scope for wages to catch up to past price and productivity increases over time without generating additional inflationary pressures, Collins said. (See: MNI POLICY: Stubborn Wage Growth Too High For Fed's Comfort)