Fed's Collins: Whether interest rates can be maintained depends on progress in inflation; if there is no sustained improvement, a rate hike will be considered.

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Boston Fed President Susan Collins stated that she currently supports keeping interest rates unchanged, but this position depends on inflation continuing to fall back towards the Fed’s 2% target and making more progress.

Collins wrote in an article published by the Boston Fed on Tuesday:

"Maintaining the current federal funds rate target range requires continued evidence that inflation is indeed declining. If sustained improvement in inflation does not appear, I believe some policy tightening in the near term would be appropriate."

The next meeting of Fed officials is scheduled for September 15-16 in Washington.

Collins said that recent inflation data reflects some weakening of underlying price pressures, which is “somewhat encouraging,” but she also pointed out that monthly data can fluctuate significantly. “Whether recent improvement will continue remains to be seen.”

At their July meeting, Fed officials kept rates unchanged. However, three policymakers supported a 25 basis point rate hike, reflecting growing divisions among officials on how to deal with persistent high inflation. Two other non-voting officials also expressed support for a hike. Collins herself is not a voting member and said she supported the decision to hold rates steady in July.

Waller is scheduled to speak at the Fed’s annual meeting in Jackson Hole, Wyoming this Friday. The market is watching this closely.

Collins stated that restrictive interest rate levels and rising long-term U.S. Treasury yields should also help alleviate some inflationary pressures from strong household and business spending. She added that the impact of earlier tariff increases on prices has largely been reflected, and the influence of rising oil prices on inflation should also begin to fade.

Collins cautioned that “less optimistic scenarios are also very probable.” She specifically pointed out that there are upside risks to inflation, coming from further adverse supply shocks on one hand, and stronger-than-expected economic activity on the other. For the latter, she noted that the construction of AI infrastructure appears to be pushing up core goods inflation.

Collins stated that the U.S. labor market remains in an “unusually balanced” state, but this balance is not without risks.

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