By Michael S. Derby
NEW YORK (Reuters) -Federal Reserve Bank of Boston President Susan Collins said Wednesday that if the economy meets her expectations the central bank will likely be able to lower rates at some point later this year.
But the official did not give any time table for action and said she will need to see more evidence inflation is moving down to the 2% target before supporting an easing in the central bank’s interest rate target.
“For the moment, policy remains well positioned, as we carefully assess the evolving data and outlook,” Collins said in a speech given to a gathering of the Boston Economic Club.
“As we gain more confidence in the economy achieving the (Federal Open Market) Committee’s goals, and consistent with the last set of projections from FOMC participants, I believe it will likely become appropriate to begin easing policy restraint later this year,” Collins said. Easing rates “gradually will provide the flexibility to manage risks, while promoting stable prices and maximum employment.”
Collins’ remarks were her first since last week’s FOMC meeting saw officials hold steady their interest rate target range at between 5.25% and 5.5%, an action she says she supported. The Fed also opened the door to lowering rates given the rapid retreat of inflation back toward the 2% target, but Fed Chairman Jerome Powell, speaking to reporters after the meeting, pushed back on the market view that the first cut could come in March.
The Fed’s caution about cutting rates was seemingly affirmed by the very strong non-farms payrolls data released on Friday. For Collins, that data helped show why the Fed needs to be nimble in moving toward easier policy.
“The unexpected strength in recent GDP and labor market data exemplifies the on-going resilience of demand, and highlights that the anticipated slowdown in activity may take some time,” Collins noted, adding “the path the economy takes toward the Fed’s mandated goals may continue to be bumpy and uneven, and we should not overreact to individual data points.”
The bank president explained what she needs to see from the economy to support an easing in policy.
“I want to see evidence of wages evolving in a way that is ultimately consistent with price stability,” the official said. She also said, “expecting all indicators to be well aligned is too high a bar, but seeing sustained, broadening signs of progress should provide the necessary confidence I would need to begin a methodical adjustment to our policy stance.”
After her formal remarks, Collins said that the Fed will not need to hit the 2% inflation target dead on to start lowering rates, saying instead that confidence in the trajectory of inflation is more important. “I totally agree” that if the Fed were to wait for 2% inflation on a 12-month basise, “that’s waiting too long.”
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