MNI: Fed's Collins Wants Measured Hikes To Peak Just Above 5%

Boston Fed President Susan Collins said Thursday interest rates will likely need to rise in more measured steps to just above 5% and then stay at that level for some time in order to tame inflation that reached near 40-year highs.

"While it is promising to see the effects of higher rates starting to spread from the most interest-sensitive sectors to the broader economy, more is required to ensure a steady path toward our inflation target," she said. "I anticipate the need for further rate increases, likely to just above 5%, and then holding rates at that level for some time."

Monetary policy tightening has slowed new rent growth considerably, which should lead to a moderation in shelter inflation starting in the spring of this year, she said, but services inflation remains persistently high. "For services outside of shelter, labor tends to be the most important input – so developments in this component of services inflation are ultimately tied to the behavior of wages," she said.

"Bringing labor market conditions into better balance will therefore be critical to achieving our inflation target," Collins told attendees of a Boston Fed conference. "While labor market activity has shown some signs of moderating, there is still a long way to go."

(See: MNI: Fed Rates Likely Headed Above 5% Despite Cooling CPI)

MEASURED ADJUSTMENTS

Now that the fed funds rate is in restrictive territory and the Fed may be nearing the peak, she said, it is appropriate to have shifted to a slower pace of tightening.

"More measured rate adjustments will better enable us to address the competing risks that monetary policy now faces – the risk that our actions may be insufficient to restore price stability, versus the risk that our actions may cause unnecessary losses in real activity and employment."

Still, Collins is optimistic there is a pathway to reducing inflation without a significant economic downturn. "I see ongoing resilience in the economy, evidenced by many firms’ continued hiring plans, and household and business spending that is holding up relatively well."

"But I also recognize risks and uncertainties to that outlook, including the possibility of a more substantial downturn driven by a self-fulfilling loss of confidence in the economy," she said.