MNI: Fed's Collins Backs One More 25BP Hike, Hold Thru Yearend

Boston Fed President Susan Collins said Thursday an additional 25 basis point hike would reasonably balance risks to bring inflation down, while recent banking developments will likely tighten lending standards and additionally help to reduce price pressures.

"Inflation remains too high, and recent indicators reinforce my view that there is more work to do, to bring inflation down to the 2% target associated with price stability," she said according to prepared remarks.

Last week's SEP shows the median FOMC official sees a fed funds funds rate range of 5% to 5.25% and this reasonably balances "the risk of monetary policy not being restrictive enough to bring inflation down, and the risk that activity slows by more than needed to address elevated price pressures," she said.

The Boston Fed chief expects holding interest rates there through the end of the year. "Of course, I’ll be carefully watching a range of indicators including data on inflation, spending, labor markets, and financial conditions."

The banking system remains strong and resilient, but recent developments will likely lead banks to take a somewhat more conservative outlook and tighten lending standards, thus contributing to slowing the economy and reducing inflationary pressures, she said. "These developments may partially offset the need for additional rate increases."

(See MNI INTERVIEW: Ex-FDIC Chair Downplays Bank Contagion Risk)

UNDERLYING STRENGTH

Since March last year, the FOMC raised rates from near zero to the range of 4.75% to 5%. "After initial, expeditious moves, recent increments have been small and deliberate – which in my view is appropriate as we approach a level that is sufficiently restrictive."

"I remain optimistic there is a path to bringing inflation down without a significant downturn, because of the resilience I see in the economy."

Recent data show signs of more underlying strength in the economy than many anticipated, she said. This strength might reflect the fact that policy did not enter fully restrictive territory until the second half of 2022, and it may be too soon to see its full effects on real activity, said Collins in remarks to the National Association of Business Economists.

Special factors may have blunted the impact of the Fed's actions, she said, pointing to household excess savings and quite strong business balance sheets limiting the need for external finance.

"But there are some emerging signs of slowing labor demand," she said. "While we may be seeing some initial signs of wage moderation, more will be needed for a sustained improvement in price inflation."