MNI: Collins Supports Further Fed Normalization This Year

Federal Reserve Bank of Boston President Susan Collins said Tuesday risks to the labor market call for further interest rate easing this year, but policy over time should remain mildly restrictive to continue to restrain inflationary pressures. 

"With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market," she said in prepared remarks to the Greater Boston Chamber of Commerce.

"Importantly, even with some additional easing, monetary policy would remain mildly restrictive, which is appropriate for ensuring that inflation resumes its decline once tariff effects filter through the economy," she said. "Policy is not on a pre-set path, and I can envision scenarios where appropriate policy calls for holding rates steady later this year and into next, as we assess effects of the recent policy actions and get more information." 

The labor market remains relatively healthy, but further weakening would be unwelcome, the Boston Fed chief said, noting break-even employment growth could be around 40,000 jobs per month now. She expects that the limited hiring and slower economic growth will result in a relatively modest increase in the unemployment rate over the remainder of this year and early next.

BALANCING RISKS

Economic activity has proved more resilient so far this year and available data suggest that spending has remained robust in the third quarter, she said. "Although economic growth remains solid, job gains have declined notably," although, "based on available information, the unemployment rate should also have remained low in September."

"Policy actions must balance both sides of the Fed’s dual mandate, while addressing the evolving balance of risks. And this task is currently complicated by the reduced availability of economic data, due to the government shutdown," Collins said. (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data)

Inflation is still above-target and has been rising recently, but inflation risks are more contained than previously thought, she said.

Still, there are a few reasons to expect further price pressures from tariffs going forward, Collins said. "First, changes in tariff policies have been quite staggered, with some levies only recently going into effect, and others not scheduled to start until later this year."

"The upside risk to inflation cannot be discounted after more than four years of price growth above the FOMC’s 2% target. The Committee’s credibility in following through on its price stability mandate is a critical asset – and an erosion in credibility would make achieving price stability even more challenging," Collins said. 

Another period of rising inflation, she said, could destabilize inflation expectations and lead to higher expected price increases going forward.