Boston Federal Reserve President Susan Collins is on board with more higher interest rates, but she's a fan of a gradual approach -- further piling on to expectations that a December rate increase is a lock and strengthening the case for 2027 hikes.
"I would currently see a steady, gradual approach as potentially being appropriate in this context," Collins said when speaking with reporters on Saturday during the Boston Fed's annual economic conference, which focused on the housing market. "The price data we've seen over the past three months, and the labor market on a stronger footing, does make me think that the path of policy, of rates, over the next year might be a bit higher than I had thought a couple of months ago."
But Collins, who is not currently a voting member of the rate-setting Federal Open Market Committee, said that given the continued geopolitical and economic uncertainty, the exact path will need to be decided meeting by meeting as data becomes available. She said she believes that a "gradual path is the better way to stitch through" the persistent risks.
"I think the direction for monetary policy is clear, I don't want to get out ahead of how quickly it makes sense to move or how much to move rates," Collins said.
Collins defended the Fed's slow approach so far to raising rates. The central bank tightened monetary policy by a quarter of a percentage point to 3.75% to 4.00% in September, but kept rates steady in October. There's ongoing uncertainty that officials must weigh, Collins said. It is plausible, for example, that the rise in medium- and longer-term rates since the beginning of the year may actually weigh on demand more than expected or that enthusiasm around artificial intelligence investment wanes and creates economic shocks, Collins said. In those scenarios, there may be a greater risk to the economy associated with an aggressive rate hiking cycle.
On inflation, Collins said that she's carefully watching the data to see if price pressures related to the recent shocks, for example, in energy, are broadening out. The October consumer price index reading, which was hotter than expected, did show much broader pressures. Prices on everyday things, from groceries to home furnishings to medical services, experienced large increases last month. Even when excluding the effects of the oil shock and volatile food prices, core inflation translated into an annual growth rate of 2.8%, up from September's 2.6% pace.
Tariffs are also still a factor Collins is monitoring. Goods price inflation, for example, had been deflationary, but that component has risen a bit. In September, good inflation was up 0.7% year-over-year.
Inflation has been elevated for a long time, Collins acknowledged, saying that the Fed needs to follow up on its commitment to bring inflation back down to 2%. She said "some further tightening of monetary policy is appropriate."
Looking at employment conditions, Collins said she's less concerned. The "unusual stability" of the labor market has prevailed, she said, adding that it's "on somewhat more solid footing." While there's been less dynamism in the labor market in recent years due to a lower supply of available workers, she sees it largely in balance -- and said that there is the potential for more growth than the U.S. has experienced so far over the past two years.
The fact that hiring has broadened across sectors is also giving her some comfort. Up until recently, month job growth was heavily concentrated in healthcare and social assistance, a situation that made labor conditions more vulnerable to shocks.
The recent strength of the labor market -- payrolls gained 165,000 and unemployment ticked down to 4.1% in October -- may be a sign of things to come. Collins said that she's hearing from employers in her district that companies are looking to hire.
"It's an unusual labor market, in my view. But what I see is stability and, somewhat more strength -- with the potential that we could see more tightening," Collins said.
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