By Michael S. Derby
NEW YORK (Reuters) – Federal Reserve Bank of Boston President Susan Collins said on Wednesday that the U.S. economy needs to cool off as an avenue toward getting inflation back to the central bank’s 2% target.
“A slowdown in activity will be needed to ensure that demand is better aligned with supply for inflation to return durably” to the official target, Collins said in remarks to be delivered at a Massachusetts Institute of Technology event.
For now, when it comes to monetary policy, “the recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward 2%,” she said.
Collins’ remarks were her first since last week’s Federal Open Market Committee meeting. Then, officials maintained their overnight target rate range at between 5.25% and 5.5%, as they continued to grapple with inflation pressures that have proved over this year more sturdy than they had expected.
The persistence of price pressures has generated considerable uncertainty over when the central bank might be able to cut interest rates. In recent appearances many Fed officials have kept alive the prospect of an easing but have backed off of providing any sort of time frame for lowering rates while they watch data for progress on lowering inflation.
In her remarks, Collins said “overall, policy remains well positioned to respond to incoming information, as we assess the evolving outlook and risks.” She also said she’s “optimistic” the Fed can get inflation to 2% “in a reasonable amount of time, with a labor market that remains healthy.”
That said, getting inflation to 2% “will take more time than previously thought,” with Collins noting “there is no pre-set path for policy – it requires decisions based on a methodical, holistic assessment of wide-ranging information.”
Collins also said in her remarks that longer-run inflation expectations have been consistent with the Fed’s 2% inflation goal, and she said that the recent jump in productivity is likely not the making of an enduring trend. Collins also said that employers are likely able to absorb higher wage demands.
(This story has been refiled to remove a picture)
(Reporting by Michael S. Derby; Editing by Andrea Ricci)