MNI: Collins Says Less Fed Easing May Be Warranted

U.S. interest rates may have to stay higher for longer after recent data showing strong jobs growth and higher core inflation compared to last year, Boston Fed President Susan Collins said Thursday, adding she continues to expect to lower rates some time this year.

Resilient demand in the face of higher rates also suggest the current level of interest rates may be restraining the economy by less than expected, she said in remarks prepared for the Economic Club of New York.

"The recent data have not materially changed my outlook, but they do highlight uncertainties related to timing, and the need for patience – recognizing that disinflation may continue to be uneven," she said. "This also implies that less easing of policy this year than previously thought may be warranted."

"I expect to see further evidence that inflation is durably, if unevenly, returning toward 2%, and that the economy is coming into better balance, with demand and supply more closely aligned amid a healthy labor market. As a result, I do expect it will be appropriate to begin lowering the federal funds rate later this year."

SERVICES INFLATION

Meanwhile, core inflation has moved up relative to the low readings in the second half of last year, she noted. Core CPI has been 0.4% for three straight months, firmer than analysts had anticipated. The implications of recent inflation reports "remain to be seen," Collins said, but she's looking for additional progress on housing and non-shelter services inflation.

Payroll growth over the last quarter averaged 276,000 jobs per month, a pace faster than needed to keep up with population growth, even accounting for increased immigration, Collins said. She's looking for continued signs of labor demand moderating in an "orderly way," but added there is room for wages to grow. (See: MNI INTERVIEW: Strong Jobs May Fuel US Productivity - Rothstein)

Resilient demand could explain the increase in inflation so far this year, especially as consumers shift spending toward services, where price pressures are still high, she said. A strong labor market is also limiting the extent to which rent inflation has slowed.

"Without ongoing supply improvements, we risk demand continuing to outpace supply and exacerbating pressure on prices. This implies that demand will need to moderate for the Fed to achieve its price-stability goal," she said. "So, while resilient activity is good news, it also raises questions about the extent to which the stance of monetary policy is actually restraining demand."