Federal Reserve should raise rates to just over 5%, Boston Fed's Collins says

Boston Fed President Susan M. Collins still sees the need for the Federal Reserve to keep increasing rates even as higher rates are starting to reduce demand in rate-sensitive sectors such as housing. For services other than housing, labor tends to be the most important input, she pointed out.


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“Bringing labor market conditions into better balance will… be critical to achieving our inflation target” of 2%, she said Thursday at a conference, according to prepared remarks. She’s expecting that the Federal Open Markets Committee will increase the federal funds rate target range to “just above 5%,” where it will stay “for some time.”

Now that rates are in restrictive territory, it will be appropriate to slow the pace from the FOMC’s initial aggressive hiking, Collins added. Since March 2022, the Fed has raised its rate by 425 basis points, including four straight 75-bp hikes. In December, the FOMC shifted to a 50-bp increase.

“More measured rate adjustments in the current phase will better enable us to address the competing risks monetary policy now faces – the risk that our actions may be insufficient to restore price stability, versus the risk that our actions may cause unnecessary losses in real activity and employment,” Collins said.

Her comments indicate that she would support a 25-bp increase at the Fed’s Jan. 31-Feb. 2 meeting. She isn’t a voting member of the FOMC this year, but she does participate in the monetary policy discussions. Markets have already priced in that expectation. The CME FedWatch tool now puts the probability of a 25-bp rate hike at 96%.

On Wednesday, Dallas Fed President Lori Logan emphasized that a slower pace of rate hikes doesn’t signal any less commitment on the Fed’s part to achieve its inflation goal.

Now read: Further slowing of rate hike pace is warranted, Dallas Fed’s Lori Logan says

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