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Collins becomes latest Fed official to warn rates likely to stay higher for longer
Boston Fed President Susan Collins said Wednesday that it will take longer “than previously thought” to reduce inflation, becoming the latest lawmaker to make clear that rates need to stay at current levels.
“Recent data leads me to believe this will take longer than previously thought,” Collins said in a speech at the Massachusetts Institute of Technology’s Sloan School of Management. “There is no pre-defined path to politics.”
Collins believes that improvements in supply chains that helped quickly cool inflation last year may not continue this year, and that slower economic growth will be needed to reduce demand and therefore inflation.
Susan Collins, president of the Federal Reserve Bank of Boston. (David L. Ryan/The Boston Globe via Getty Images) (Boston Globe via Getty Images)
Still, she remains optimistic that inflation can return to the Fed’s 2% target within a reasonable period of time and with a job market that remains healthy.
Other Fed officials also showed this week that they favor keeping rates at current levels for longer.
New York Fed President John Williams said on Monday that “politics is in a very good position 1715186406 and we have time to collect more, as steady as it goes.”
Minneapolis Fed President Neel Kashkari said Tuesday that he believes rates will likely need to be maintained at current levels for an “extended period”, but also did not rule out an increase if inflation remains close to 3%.
“I think it’s much more likely that we’re going to sit here longer than we expect or the public expects now until we see the effect that our monetary policy is having,” Kashkari said at the Milken Institute conference in Los Angeles.
This week’s comments from several Fed officials come after the Fed’s interest rate setting committee decided last week to maintain its benchmark rate in a range of 5.25%-5.50%, a 23-year high, at the conclusion of its two-day policy meeting.
See more information: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
O federal funds rate has been in this range since July 2023.
The committee stated in its latest policy statement that “in recent months, there has been a lack of further progress towards the committee’s 2 percent inflation target.”
The authorities reiterated that more clarity would be needed on the prospects for inflation returning to the target before cutting rates.
Inflation showed a lack of progress in the first three months of the year after a steady decline in the second half of last year.
“The Committee does not expect it to be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement read.
The story continues
Collins said Wednesday that he sees rates in the current range of 5.25%-5.5% as having a “moderately restrictive” impact on the economy, but at a level that balances the risks of cutting rates too soon with the to postpone them for a long time.
“It is possible that policy has become restrictive more recently than previously thought, and we have not yet seen its full impact, especially if the economy becomes more interest-sensitive over time as companies refinance their debt existing low-cost savings and households use up their excess savings. accumulated at the beginning of the pandemic,” she said.
Before taking the step to lower rates, Collins said he is watching whether inflation continues to fall, especially in the areas of housing and services, while also looking for signs that short- and long-term inflation expectations remain in place. well anchored.
The labor market, she said, must become more balanced, with a more equal supply of workers in relation to employer demand. And wages need to increase in a way that is not inflationary.
Overall, companies appear well positioned to potentially absorb faster wage growth without increasing inflation, Collins said.
But she said she believes the recent increase in productivity is a readjustment rather than a persistent increase, although it’s possible it could turn into something more durable.
Productivity – output per worker – is key to containing inflationary pressures – and one of the reasons why economists believe the economy was able to be resilient last year without rising inflation.
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