Boston Federal Reserve President Susan Collins said on Wednesday that the U.S. central bank could be forced to raise interest rates if inflation pressures remain elevated.
Delivering remarks prepared for the Boston Economic Club, Collins linked much of the near-term trajectory for monetary policy to the duration of the war in the Middle East, warning that an extended conflict raises the risk of renewed inflation pressures.
Summary
Collins said the longer the conflict persists, the greater the risks to inflation and to global supply chains. She noted that although recent changes in the U.S. economy have improved its ability to absorb energy shocks, the fact that new upward pressure on prices has arrived on top of already persistent inflation alters her judgment about how much to "look through" such shocks.
In her prepared text, Collins said:
"While it is not in my most likely outlook, I could envision a scenario in which some policy tightening is needed to ensure that inflation returns durably to 2% in a timely manner,"underscoring that additional tightening is conditional on how inflation evolves.
She stressed that the cumulative effect of price pressures over recent years has reduced her willingness to dismiss another supply shock. As she put it:
"More than five years of above-target inflation has reduced my patience for 'looking through' another supply shock,"and she emphasized the importance of anchoring inflation expectations.
Collins described the current monetary stance as "well positioned to adjust to the evolving outlook and balance of risks," and added:
"given this outlook and the balance of risks, I believe it will likely be important to maintain the current slightly restrictive monetary policy stance for some time."
On global spillovers, Collins warned that even a quick resolution of the U.S.-Israel war with Iran would leave global supply chains disrupted and under strain. She said the U.S. economy is relatively insulated from these direct effects, but cautioned that a prolonged conflict raises the likelihood of more significant negative spillovers.
Key takeaways
- Fed policy could require additional tightening if inflation does not ease.
- The duration of the Middle East conflict is a central determinant of inflation risk and the policy path.
- Current policy is described as slightly restrictive and should likely be maintained for some time, according to Collins.
Sectors affected
- Energy - sensitivity to geopolitical-driven price shocks.
- Global manufacturing and trade - exposure to supply chain disruptions.
- Financial markets - interest rate expectations and monetary policy outlook.