Susan M. Collins, the president of the Federal Reserve Bank of Boston, said she is leaning towards a quarter-point rate hike at the next central bank meeting — a slowdown that would signal a return to a normal pace of monetary adjustment after a year, in which officials took swift action to slow the economy and curb inflation.
Fed policymakers hiked interest rates from near zero to a range of 4.25 to 4.5 percent in 2022, an aggressive path that included four consecutive three-quarter-point adjustments. Officials slowed December with a half-point rate move, and some of the Fed’s regional governors have in recent days hinted that an even smaller adjustment could be possible when the Fed releases its next decision on February 1.
Ms Collins added her voice to that chorus – but even more declaratively by clarifying that she would support a 25 basis point or quarter point slowdown in interest rate adjustments at this point. A gradual change in policy would give the central bank more time to see how its actions are affecting the economy and whether they are working to curb rapid inflation.
“I think 25 or 50 would be appropriate; I’d be guessing 25 at this point, but it’s very data dependent,” Ms Collins said in an interview with the New York Times on Wednesday. “Slow adjustment gives more time to evaluate the incoming data before making a decision as we near our goal. Small changes give us more flexibility.”
Ms. Collins is one of the Fed’s 12 regional bank governors and one of its 19 policymakers. It doesn’t have a formal vote on interest rate changes this year, but it will participate in the deliberations if the decision is made.
Frequently asked questions about inflation
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the price of essential goods and services such as food, furniture, clothing, transportation and toys.
What Causes Inflation? This may be the result of increasing consumer demand. However, inflation can also rise and fall on developments that have little to do with economic conditions, such as E.g. limited oil production and problems in the supply chain.
Is inflation bad? It depends on the circumstances. Rapid price increases mean problems, but moderate price increases can lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation usually spells trouble for stocks. Financial assets in general have historically performed poorly during inflationary booms, while tangible assets like houses have held up better.
Ms Collins said she prefers to raise interest rates to just over 5 per cent this year, possibly in three-quarter-point increments in February, March and May.
“If we’ve moved to slower, more sensible rate hikes, it could take us three rate hikes to get there — and then holding out through the end of 2023 still seems a reasonable outlook to me,” she said.
Higher interest rates slow the economy by making it more expensive to borrow money, which weighs on home purchases, business expansions, and other large purchases. But the full impact will take time to unfold, so policymakers are aware that a relentless hike in the cost of borrowing risks overdoing their policy response – slowing growth more sharply and putting more people out of work than is strictly necessary, to curb inflation.
But Fed officials are also concerned about understating it. They want to make sure they fully curb today’s rapid inflation, because if price increases last too long, consumers and businesses could get used to them and adjust their behavior. At that point, inflation would be an ingrained feature of the economy, which could make it much more difficult to defeat.
To strike a balance between the two risks, Fed officials are slowing rate hikes but also pledging to keep rates high for some time – hoping the combination will mitigate the risk of a painful recession while comforting investors and households assure that Fed policymakers remain serious about fighting inflation.
“I’m thinking of smaller increases than what determination looks like at the moment,” Ms Collins said.
Inflation is now starting to slow as commodity price increases are moderate and global supply chains recover, but bringing it fully back to the Fed’s 2 percent target could be a challenge. Prices for a range of services have risen rapidly and central bankers believe they may remain stubbornly high as labor shortages prompt companies to pay more. Companies will likely try to pass these price increases on to their customers.
That’s why Fed officials are looking for signs that the job market is noticeably slowing — ones that have been elusive so far. Employers have continued to hire at a rapid pace in recent months, the unemployment rate is at a 50-year low and wage growth is unusually robust.
The current pace of job growth is “well above what is sustainable,” Ms Collins said, explaining that it was important to slow the labor market on a range of measures from wage growth to wage increases.
Understand inflation and how it affects you
But most economists are expecting a more pronounced slowdown in the coming months, and Fed officials are waiting to see if that prospect materializes.
Mary Daly, the president of the Federal Reserve Bank of San Francisco and a colleague of Ms Collins, said in an interview with the Wall Street Journal this week that either a quarter-point rate hike or a half-point rate adjustment is possible at the forthcoming meeting, which suggests suggests that slowing down might be a good idea.
“If you’re seriously data-dependent, incremental steps give you the ability to act on incoming information and account for those delays,” she said. Mrs Daly has no political vote this year.
Raphael Bostic, president of the Federal Reserve Bank of Atlanta and also a 2023 abstainer, said at a conference last week that a half-point or three-quarter-point move could be on the table, stating that he’s “very open to both.” ” depending on incoming data.
But Fed officials have also stressed that their fight against inflation isn’t over — and that’s important for investors to understand, as policy changes trickle down to affect the real economy via financial markets.
You have repeatedly stressed that the key to fighting inflation is to keep interest rates high for an extended period of time, not continue to adjust them quickly.
“We’ve really entered the second phase of our work: the first phase was about being aggressive,” Ms Collins said on Wednesday. “Now that we’re in restrictive territory, I continue to believe what I consider to be ‘sound’ steps are the right way to get there.”
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