MNI: Fed's Collins Says Data Hasn't Altered View Of Rate Peak

Federal Reserve Bank of Boston President Susan Collins said Friday that recent positive data has not changed her view of what is needed to return inflation to 2% over time.

In remarks prepared for delivery at a Boston Fed conference focused on labor markets, Collins said restoring price stability "will require additional increases in the federal funds rate, followed by a period of holding rates at a sufficiently restrictive level for some time.

"The latest data have not reduced my sense of what sufficiently restrictive may mean, nor my resolve," she said, without offering her view of what that level may be. The Fed, Collins said, is committed to returning inflation to the 2% target "in a reasonable amount of time."

Recent positive news on inflation has led investors to bet the Fed may not have to do as much as expected, and may only need to raise the target policy rate to around 5%. It is currently set in a range of between 3.75% and 4%. (See: MNI INTERVIEW: US Inflation Likely At Turning Point-SF Fed Econ)

LABOR OPTIMISM

Collins said she remains optimistic that there is a pathway to re-establishing labor market balance with only a modest rise in the unemployment rate – while remaining realistic about the risks of a larger downturn.

"More specifically, the Phillips Curve may be steeper at unemployment rates near 3.5%," she said. "With a much steeper Phillips Curve at low unemployment rates, these additional demand pressures would result in much higher inflation, with little further reduction in the unemployment rate. In this view, the pandemic has traced out a portion of the Phillips Curve that may have always existed but was not empirically relevant in recent decades."

"If true, this would raise the likelihood of a similarly rapid decline in inflation associated with modest increases in unemployment, as tight monetary policy eases demand pressures," she said. (See: MNI INTERVIEW: Fed Can Cool Economy With Modest Job Losses)