MNI: Fed’s Collins Wants Greater Confidence In Disinflation

Strong readings on inflation and employment highlight the need for Federal Reserve officials to take time to gain greater assurance that last year’s decline in inflation will persist, Boston Fed President Susan Collins said Wednesday.

“Recent data illustrate the need for greater clarity that inflation is sustainably on a path back to the 2% target before adjusting the policy stance,” Collins said in prepared remarks.

She cited stronger-than-expected hiring and a hot inflation print in January. “I do expect the economy will eventually slow as we see the full effects of past monetary policy actions take hold. But I also expect the path will continue to be bumpy, and we should not overreact to individual data readings,” she said. (See MNI: Fed To Stay Patient Amid Bumpy Inflation-Groen)

The Boston Fed chief said it will likely become appropriate to begin easing policy later this year. "When this happens, a methodical, forward-looking approach to reducing rates gradually should provide the necessary flexibility to manage risks, while promoting stable prices and maximum employment," she told the Tuck School of Business at Dartmouth College.

STICKY SECTORS

Price pressures emanating from housing and services are still lingering, which is a source of concern, Collins said.

“While goods inflation has returned to and moved below its pre-pandemic levels, the other two subcomponents are more ‘sticky’ and are taking longer,” she said, stressing the Fed’s target is 2% year-over-year growth of total PCE prices and the focus on inflation components is not about adding additional objectives. "If the effects of supply chain improvements that have helped lower core goods inflation below historic levels wane, inflation in other components will need to decline for our goal to be met."

Still, Collins believes inflation can return to the Fed’s 2% target without major damage to the job market. She also thinks wage growth can remain robust without risking inflation because there are signs that productivity growth has made a turn for the better.

“There is room for wages to continue increasing faster than the Fed’s 2% inflation target plus trend productivity growth, without necessarily being inflationary, but to make up for previous productivity gains and price increases,” she said.

“I remain what I call a ‘realistic optimist’ in thinking that the economy is on a path to 2% inflation on a sustained basis, while maintaining a healthy labor market.”