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A top official at the US Federal Reserve has raised the spectre of further interest rate rises in the US, warning that the strength of the world’s largest economy means “we may have more to do”.
In an interview with the Financial Times on Thursday, Susan Collins, president of the Boston Fed, said she was “surprised” by the economy’s resilience — including a tight labour market and robust consumer spending — despite months of higher borrowing costs.
“I am not yet seeing the slowing that I think is going to be part of what we need for that sustainable trajectory to get back to 2 per cent [inflation] in a reasonable amount of time,” Collins said, later adding that “that resilience really does suggest we may have more to do”.
The Boston Fed president also said the US central bank needed to be patient as it weighed further tightening of monetary policy.
Collins stressed that she had not yet made a decision about the upcoming policy meeting in September, but repeatedly emphasised the benefits of moving gradually and assembling a “larger set of data to extract the signal as we make decisions”.
The Fed’s aggressive tightening since March 2022, which has lifted the federal funds rate from near zero to above 5 percentage points, left it “really well positioned to have that patience”, Collins said.
The Boston Fed president said the Fed may be near, or have already reached, a level of rates “to hold for some time”. But she said this did “not imply in my view that there is not a very real possibility that we will need to make some additional increments”.
Collins’ comments came as leading officials from advanced and emerging economies arrived at the Kansas City Fed’s annual monetary policy conference in Jackson Hole, Wyoming.
They also precede a widely anticipated speech by Fed chair Jay Powell, who is scheduled to speak on Friday about the outlook at a pivotal moment in the central bank’s historic inflation-fighting campaign.
Price pressures have receded and the once ultra-tight US labour market has begun to soften, but clear signs that the economy still retains considerable momentum have put officials on edge.
This has cast doubt on the speed at which inflation, which is still running well above the Fed’s longstanding 2 per cent target, will moderate from here and has ignited an intense debate internally at the Fed about whether officials have done enough to date to quell demand.
Officials are also weighing the recent surge in US borrowing costs, which has tightened financial conditions by a magnitude that some economists reckon could have a significant impact on growth. Mortgage rates have soared to decade-plus highs alongside real interest rates, or Treasury yields once adjusted for inflation. Taken together, that could well reduce the need for further tightening by the Fed.
Collins, who joined the Fed roughly a year ago as the first black woman to lead one of the central bank’s 12 regional banks, described the recent tightening of financial conditions as “helpful” for the Fed’s goals to moderate demand, saying that “it is part of how the work gets done”.
Despite a growing cohort of officials who appear increasingly sceptical about the need to keep squeezing the economy now that the federal funds rate is above 5 per cent, the fear of another rise in inflation has made the top ranks of the Fed hesitant — like Collins — to rule out more rate increases. It has also compelled officials to stress that when the Fed is indeed done raising rates, it will keep them at so-called “restrictive” levels for a while.
Collins said interest rate cuts were “sometime down the road” and not on a “preset path”.
Asked whether the era of ultra-low interest rates that followed the global financial crisis had ended, Collins said it was a “possibility” that the so-called neutral rate, which neither stimulates nor suppresses growth, had risen in the aftermath of the coronavirus pandemic, but said it was “too early to say”.