MNI: Fed's Collins Says Further Tightening Not Off Table

Boston Fed President Susan Collins said Friday further tightening is not off the table and emphasized that she expects rates to stay higher for longer.

"I fully support the FOMC statement and agree with the policy guidance in the median SEP projections. I expect rates may have to stay higher, and for longer, than previous projections had suggested, and further tightening is certainly not off the table," she said in prepared remarks.

Collins said although inflation is still too high, it is down from its earlier peak, and there is some evidence demand and supply are rebalancing. A labor market realignment is "needed to reduce the upward pressure on prices."

"Importantly, the current policy phase requires patience, allowing time to better separate the signal from the noise in the data," Collins said.

The FOMC this week left the fed fund rate in a range of 5.25% to 5.5% and a majority expect one more rate hike in the cycle. The median FOMC participant also now only sees 50 basis points of rate cuts next year to 5.1%. (See: MNI FED WATCH: Proceeding Carefully To Peak Rates)

LONGER LAGS?

Progress on inflation has not been linear and is not evenly distributed across sectors, Collins said. "Inflation in core services excluding shelter, which accounts for over half of our preferred core inflation measure, has yet to show the sustained improvement that would be consistent with price stability."

"So while there have been promising developments, it is too soon to be confident that inflation is on a sustainable trajectory back to the 2% target," she said in her speech to the Maine Bankers Association.

Monetary policy has tightened considerably to date, but economic activity has been resilient and it may be taking longer than usual to see the broader economic impact of monetary policy actions, Collins said. Many firms have been insulated from the rate hikes by extending the maturity of their debt when rates were low.

Now, debt-market activity is picking up and households’ excess savings are declining, while reliance on credit card spending is rising. "This all suggests that business and household spending are likely to become more interest sensitive, helping to temper demand growth and realign it with supply."