Fed’s Collins says economy may need to weaken to get 2% inflation

Fed’s Collins says economy may need to weaken to get 2% inflation

By Michael S. Derby

NEW YORK (Reuters) – Boston Federal Reserve President Susan Collins said on Wednesday the U.S. economy needs to cool down to bring inflation back to the central bank’s 2% target.

“A slowdown in activity will be necessary to ensure that demand is better aligned with supply so that inflation returns sustainably” to the official target, Collins said in a speech at a Massachusetts Institute event of Technology.

For now, regarding monetary policy, “recent upside surprises in activity and inflation suggest the likely need to keep policy at its current level until we are more certain that inflation evolves sustainably towards 2%,” she declared.

Collins’ remarks were the first since last week’s Federal Open Market Committee meeting. Then, the authorities maintained their target overnight rate range between 5.25% and 5.5%, while continuing to combat inflationary pressures which this year proved stronger than expected.

Persistent price pressures have generated considerable uncertainty about when the central bank might cut interest rates. In recent appearances, many Fed officials have maintained the prospect of easing but backed away from providing any timetable for rate cuts while monitoring data on progress in reducing inflation.

In his remarks, Collins said that “overall, policy remains well positioned to respond to incoming information, as we assess the evolving outlook and risks.” She also said she was “optimistic” about the Fed’s ability to bring inflation back to 2% “in a reasonable time frame, with a labor market that remains healthy.”

That said, getting inflation back to 2% “will take longer than previously thought,” with Collins noting “there is no predefined policy path – it requires decisions based on methodical assessment and holistic view of a wide range of information.

Collins also said in her remarks that long-term inflation expectations were consistent with the Fed’s 2% inflation target, and she added that the recent jump in productivity was probably not the origin of a lasting trend. Collins also said employers would likely be able to absorb higher wage demands.

(This story has been refiled to remove an image)

(Reporting by Michael S. Derby; Editing by Andrea Ricci)

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