MNI: Fed's Collins Says Gradual Easing Likely Later In Year

Boston Fed President Susan Collins said Wednesday gradual interest rate cuts are likely to begin later this year, but a durable return to 2% inflation will probably also require demand growing at a more moderate pace in 2024.

"As we gain more confidence in the economy achieving the committee’s goals, and consistent with the last set of projections from FOMC participants, I believe it will likely become appropriate to begin easing policy restraint later this year," she said in prepared remarks. "A methodical, forward-looking strategy that eases policy gradually will provide the flexibility to manage risks, while promoting stable prices and maximum employment."

Collins said she fully supported the FOMC policy statement last week and has been heartened by the progress to date in the economy, but she will need to gain "additional confidence in the baseline forecast of sustained low inflation with a healthy labor market." (See: MNI: Fed Will Wait On Rate Cuts In Strong Economy-Stevenson)

DEMAND MODERATION

Much of the better-than-expected fall in inflation in 2023 was due to positive supply-side developments, but it is an open question how much longer that progress will continue, Collins said.

"While we may see some more labor force growth, the prospects for additional labor supply improvements seem somewhat limited."

Thus, "a durable return to 2% inflation will likely require demand growing at a more moderate pace this year. I expect this slowdown will happen, but the timing is difficult to predict, and the road may well be bumpy," Collins told the Boston Economic Club.

Expecting economic data to be "aligned" is too high a bar, she said, but "seeing sustained, broadening signs of progress should provide the necessary confidence I would need to begin a methodical adjustment to our policy stance."

Collins "will not be surprised if demand remains fairly robust in the early part of 2024," given household and business balance sheets, but there are "some signs consistent with an expected demand moderation." Delinquencies on credit card and auto loans have risen briskly and are around pre-pandemic levels, and orders for capital goods excluding aircraft are slowing, she said.

The Boston Fed chief also noted there is room for wages to catch up with past price growth and continue increasing at a healthy pace for some time "without necessarily spurring inflationary pressures."