Boston Federal Reserve President Susan Collins stated that interest rates should remain unchanged "for some time," highlighting her particular concern about persistently high inflation. In prepared remarks for an event organized by the Boston Economic Club on Wednesday, Collins noted, "More than five years of inflation running above target has eroded my patience for 'looking through' yet another supply shock." She anticipates that, if the Middle East conflict is resolved "fairly quickly," the year will bring solid economic growth, with the unemployment rate potentially rising slightly but with little progress on reducing inflation. "I believe it may very well be important to maintain the current modestly restrictive policy stance for some time," she said. She added that inflation running above target levels has brought the focus to keeping inflation expectations anchored near the Fed's 2% goal. The Federal Reserve held rates steady last month, citing continued high uncertainty regarding the duration of the conflict involving Iran and its impact on inflation and economic activity. Policymakers are grappling with sharp increases in energy and food prices, which have pushed the annual consumer price inflation rate to 3.8%, marking the largest increase since 2023. Meanwhile, economic activity remains resilient, and the unemployment rate is low. Despite this, a growing number of Fed officials have begun expressing concern about persistent price pressures. Three voting members of the Federal Open Market Committee (FOMC) dissented from the statement that "the next move is likely to be a rate cut." Last week, Collins told media she agreed with these dissenters. On Wednesday, Collins stated that the likelihood of alternative scenarios has increased, including higher and more persistent inflation, a deterioration in the labor market, or both. She pointed out that continued shipping disruptions in the Strait of Hormuz would exacerbate global economic pressures. "The longer and more disruptive the Middle East conflict, the greater the impact on inflation—not just on energy, but also on food and many categories of goods and services in the core basket," Collins said. She added, "While this is not the most likely scenario in my forecast, I can envision a situation where further policy tightening may be necessary to ensure inflation returns to 2% in a timely and sustained manner. For now, however, I believe the monetary policy stance is well-positioned to adjust based on the evolving outlook and balance of risks." As Collins has recently signaled an unusually hawkish stance, the Fed's policy balance is undergoing its most significant shift since 2023. Against the backdrop of global macroeconomic turbulence, the internal consensus has evolved from "when to cut rates" to "how to contain inflation through prolonged high rates or even resuming rate hikes." According to the CME FedWatch Tool, the probability of the Fed maintaining rates in June is 99%, with a 1% chance of a cumulative 25 basis point cut. The probability of unchanged rates in July is also 99%, with a 1% chance of a 25 basis point cut. Officials generally believe that the deterioration in the Middle East situation not only directly raises energy costs but also triggers secondary inflation through supply chains. This "imported inflation" resonates with the tariff policies initiated in April 2025. The previously resilient U.S. consumer market is now facing mounting pressure from surging living costs due to the dual squeeze of energy prices and food costs. This explains why, even with the unemployment rate remaining low, the Fed is treading cautiously—it must make a difficult choice between the risk of recession and runaway inflation. The current consensus summary indicates that the Fed has entered a "defensive mode." Until the path for inflation to fall back to 2% becomes clear, rates will remain in the 3.50%-3.75% range or even higher. For investors, this means abandoning any幻想 of a "liquidity pivot." Statements following the April rate decision revealed that internal divisions between "fighting inflation" and "supporting growth" have reached their most severe level in years. With the end of the Powell era and the upcoming tenure of Warsh, the June meeting will be a key window to observe the new chair's policy style. However, given stubborn inflation and geopolitical risks, policy is likely to remain on hold in the near term.
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