A senior Federal Reserve official stated that the conflict in Iran has intensified cost-of-living pressures, making it difficult for low-income Americans to stay afloat, while also warning that the Fed may need to raise interest rates to curb inflation.
Boston Federal Reserve Bank President Susan Collins said in an interview that businesses and households in the northeastern United States are feeling the pinch of inflation. U.S. inflation has remained above the Fed's 2% target for over five years. Speaking at the Boston Fed headquarters about her conversations with businesses across the region, she noted, "In almost every conversation, people complain about prices, just in different ways."
Collins supported keeping interest rates unchanged in July. She added, "Among middle- and lower-income households, I'm hearing more and more people talk about the struggle to get by... it's hard to make ends meet. Energy prices are a particular pressure point, and we feel it strongly here in the Northeast." Compared to other U.S. regions, New England relies more heavily on heating oil in winter and uses oil as a backup fuel for power generation, making it especially vulnerable to spikes in global crude prices.
Collins made these remarks on Tuesday, as markets awaited July inflation data due Wednesday evening, which will influence whether the Fed raises rates at its next meeting in September. This year, the Trump administration's military conflict with Iran has nearly halted oil shipments through the Strait of Hormuz, directly fueling U.S. inflation. Combined with tariff barriers and surging costs from AI infrastructure spending, U.S. prices have risen further. U.S. consumer price inflation climbed from 2.4% in February to a three-year high of 4.2% in May, before easing to 3.5% in June as fuel prices dipped slightly. However, recent rebounds in retail gasoline prices make July's inflation data difficult to predict, raising concerns that the Fed may struggle to contain inflation's cascading effects.
After the Fed paused rate hikes last month, overall borrowing costs rose. Three policymakers dissented from the majority, advocating for an immediate rate increase. Collins, who currently lacks a voting seat on the Federal Open Market Committee (FOMC), supported holding rates steady in July. She views current rates as mildly restrictive, capable of gradually lowering inflation, but indicated she would support a rate hike in September if economic data warrants tighter policy. "Economic conditions in the coming months may require tighter monetary policy, and I would then favor raising rates," she said.
A media survey of economists predicts that overall U.S. inflation remained high in July, but the year-over-year rate may edge down to 3.4%. Core inflation, excluding volatile food and energy prices, is expected to slow from 2.6% to 2.5%. Even if it declines, price growth remains far above the Fed's 2% target. The Fed's preferred Personal Consumption Expenditures (PCE) price index rose 3.7% year-over-year in June, above target since early 2021.
Three regional Fed presidents who voted for a rate hike last month—Cleveland Fed's Beth Hammack, Dallas Fed's Lorie Logan, and Minneapolis Fed's Neel Kashkari—warn that the longer inflation stays high, the harder it will be to control. Aligned with Collins, three Fed governors—Lisa Cook, Philip Jefferson, and Christopher Waller—have said they could support a 25-basis-point rate hike in September if inflation does not show clear signs of cooling. New York Fed President and FOMC Vice Chair John Williams signaled he would also back higher borrowing costs if inflation persists. Last week, media reported that if upcoming economic data is seen as requiring higher financing rates, Fed Chair Kevin Warsh might favor a rate increase.
Investor pricing currently shows about a 50% probability of a 25-basis-point rate hike at the mid-September meeting. The labor market's softening has complicated policymakers' decisions. July employment data, released last week, fell far short of expectations, with a loss of 23,000 jobs nationwide, prompting markets to lower near-term rate-hike expectations. Over the past three months, average monthly job gains were just 20,000, a sharp drop from 73,000 in the first quarter. The U.S. job market is in a stalemate, with weak hiring and low layoffs.
But Collins cautioned against overinterpreting the latest nonfarm payroll data. She noted that private-sector employment continues to grow, with job gains across various industries, and the unemployment rate remains "relatively stable." "Monthly employment data is inherently volatile, and labor supply growth is slowing. As I've said before, it's normal to see months of negative job growth and others with big surprises," she said. However, she added that while the "overall job data is mixed" and the market is in a "rare state of balance," the risk from rising inflation remains more prominent. "There's still a lot to watch on the employment front, but inflation is still too high," she concluded.
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