A top Federal Reserve official has said she expects the US central bank to implement one more quarter-point rate rise in its battle against high inflation, despite lingering concerns about the stability of the banking system.
Susan Collins, president of the Boston Fed, on Thursday said inflation across the country remains too high, arguing there is “more work to do” to get it back to the central bank’s 2 per cent target.
“I currently anticipate some modest additional policy tightening, and then holding through the end of this year,” she said as she endorsed this month’s projections from the Fed, which showed most officials backing the federal funds rate rising to 5 per cent to 5.25 per cent this year.
The benchmark rate currently hovers at 4.75 per cent to 5 per cent, following the central bank’s decision to plough ahead with a quarter-point rate increase last week despite the recent turmoil that has engulfed the regional bank sector.
Speaking at a conference hosted by the National Association for Business Economics, Collins described the Fed’s latest forecast as “reasonably balancing the risk of monetary policy not being restrictive enough to bring inflation down, and the risk that activity slows by more than needed to address elevated price pressures”.
In the press conference that followed the latest rate decision, Fed chair Jay Powell warned of a potential credit crunch as lenders pull back — a view Collins echoed on Thursday.
She said it was “likely” banks would now “take a somewhat more conservative outlook and tighten lending standards, thus contributing to slowing the economy and reducing inflationary pressures”.
“These developments may partially offset the need for additional rate increases,” Collins added. Powell has said the recent tightening of financial conditions could be the equivalent of a “rate hike or perhaps more than that”. In a discussion that followed her remarks, Collins said she had planned to raise her forecast for the fed funds rate this year before the implosion of Silicon Valley Bank.
Collins on Thursday reiterated her belief that the Fed can pull off a so-called “soft landing”, avoiding a recession as it damps demand through higher borrowing costs.
“I am well aware of the many risks and uncertainties facing our economy, including the risk of a self-fulfilling loss in business and consumer confidence,” she said.
“However, I’ve also mentioned reasons to be optimistic the economy may prove more resilient to tight financial conditions than in the past — including business and household fundamentals that remain relatively strong,” she said.
