Fed's Collins says she's not surprised by unwelcome inflation data

By Greg Robb

Boston Fed president backs holding rates steady

Boston Federal Reserve Bank President Susan Collins said Wednesday that she wasn't surprised by the unwelcome news on inflation given the rapid progress seen last year, but she added that the U.S. economy still needs to slow more in order to cool price pressures in the coming months.

Inflation surprised to the upside in the first quarter, with the core personal consumption expenditures price index going up at a 3.7% annual rate after two straight quarters at a 2% rate of increase.

Favorable factors, like repaired supply chains that helped push inflation down last year, might not persist, she said. As a result, "progress on inflation will very likely require lower growth in demand, particularly to facilitate further slowing of core non-housing services inflation."

Collins, who was speaking at the Sloan School of Management at the Massachusetts Institute of Technology, said that she does expect that the economy will slow as needed, "but the timing and magnitude of moderation remain uncertain."

On interest rates, the recent surprises to inflation and growth "suggest the likely need to keep [the policy rate] at its current level until we have greater confidence that inflation is moving sustainably toward 2%," she said.

Collins said the current level is "moderately restrictive," putting some downward pressure on demand. Some other Federal Reserve officials, like Minneapolis Fed President Neel Kashkari, are not certain that rates are slowing demand.

"It is possible that policy became more restrictive more recently than thought, and we have not yet seen its full impact," she said, adding that the economy could become "more interest-sensitive over time" as companies move to refinance debt and households exhaust their excess savings.

"It's just going to take longer than previously thought" to get inflation back to the Fed's target rate of 2%, she said. She stressed the uncertainty in the outlook.

Collins will be a voting member of the Fed's interest-rate committee next year. Overall, her views don't seem far from those of Fed Chairman Jerome Powell, who told reporters last week that it will likely take time for the Fed to gain the confidence to cut rates.

"We can be patient, and we'll be careful and cautious as we approach the decision to cut rates," Powell said.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y ticked higher, to 4.485% in morning trading.

The Fed has held its benchmark policy rate in a range of 5.25%-5.5% since last July. Traders in derivative markets expect the Fed to cut rates twice before the end of the year, likely at its September and December meetings.

-Greg Robb

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-08-24 1251ET

Copyright (c) 2024 Dow Jones & Company, Inc.