MNI: Fed Collins Says Sept SEP ‘Starting Point’ For Rate Peak

It’s too soon to say how high interest rates need to rise in order to tame inflation near 40-year highs but the risks of overtightening rise as monetary policy becomes restrictive, Boston Fed President Susan Collins said Friday.

“It is premature to signal how high rates should go,” she said in prepared remarks to the Brookings Institution. “The median path in September’s Summary of Economic Projections can be taken as a starting point of my current thinking, with the possibility of a higher path depending on incoming information.”

Those projections foresaw interest rates peaking at 4.6% though Fed Chair Jerome Powell signaled at this week’s press conference the terminal rate was likely already higher. Ex-officials have told MNI rates need to peak at 5% or higher.

“With rates now in restrictive territory, I believe it is time to shift focus from how rapidly to raise rates, or the pace, to how high – in other words, to determining what is sufficiently restrictive,” Collins said. “Down the road, when we get there, in my view we’ll need to shift again to focus on how long to hold rates at that level.”

“As policy tightens further, the risks of overtightening increase,” Collins added.

VARIOUS OPTIONS

The Fed raised interest rates by 75 basis points this week, the fourth such move in as many meetings, bringing the federal funds rate to a range of 3.75% to 4%. The FOMC said in its statement it wants policy to become “sufficiently restrictive” without specifying what that might mean.

“In thinking about how to reach the level of the funds rate at which the Committee will deem appropriate to hold policy, I believe it is important for us to consider the various options for policy moves,” Collins said. “This will include 75 basis points, as well as smaller increments. I note that a 50 basis-point move was considered a large move in the past.”

Collins described the economy as robust, backed by strong household and corporate balance sheets, and thus able to absorb tighter financial conditions.

“I do not believe a significant slowdown is required to accomplish our goal of restoring price stability,” she said. “Therefore, it will increasingly be important to balance the risk of possibly slowing demand in the economy too much, with the risk of allowing inflation to persist too long and possibly de-anchoring inflation expectations.”

The latest employment numbers corroborated Collins' optimism, showing a larger-than-expected gain of 261,000 new jobs in October.