Boston Fed Chair Supports Keeping Interest Rates Steady Temporarily, Warns That Rapid Rate Hikes May Be Needed If Inflation Does Not Continue to Cool

Boston Federal Reserve President Collins stated on Tuesday that she still supports the Federal Reserve's decision to keep interest rates unchanged, but this stance has a clear precondition: further evidence is needed in the future to prove that inflation is consistently moving back toward the 2% target. If the improvement in inflation cannot be sustained, she believes the Federal Reserve may need to tighten monetary policy further soon. In an article published by the Boston Fed on the same day, Collins remarked, Maintaining the current federal funds rate target range requires ongoing evidence that inflation is indeed declining. If sustained inflation improvement does not occur, I believe tightening policy will be appropriate soon. The Federal Reserve's next monetary policy meeting will be held in Washington from September 15 to 16. As the September meeting approaches, the internal divisions regarding whether further rate hikes are needed are being closely watched by the market. Collins noted that the recent inflation data indicate a easing of underlying price pressures, which she described as "slightly encouraging." However, she also cautioned that monthly inflation data can be quite volatile and it is still uncertain whether the recent improvements can be sustained. During the July policy meeting, the Federal Reserve kept interest rates unchanged, but clear divisions regarding the next policy direction have already emerged internally. At that time, three Federal Reserve policymakers advocated for a 25 basis point rate hike, reflecting concerns among some officials that persistently high inflation above the target may necessitate further tightening of policy. Additionally, two regional Fed officials without voting rights this year also expressed their support for a rate increase. Collins similarly lacks voting rights on the Federal Open Market Committee (FOMC) this year. She stated her support for the Fed's decision to maintain interest rates at the current level in July. She believes that the current restrictive policy rates, combined with the recent significant rise in long-term U.S. Treasury yields, contribute to tightening financial conditions, thereby alleviating some of the inflationary pressures from robust consumption by households and businesses. At the same time, she anticipates that the transmission of previous tariff increases to commodity prices has largely been released and that the upward pressure on inflation from rising oil prices should also gradually diminish in the future. If these factors develop as expected, the Federal Reserve may have more time to observe inflation trends without needing to raise interest rates immediately. However, Collins also warned that less favorable scenarios are "entirely possible." She stated that new negative supply shocks and stronger-than-expected economic activity could pose upward risks to inflation. Notably, Collins specifically mentioned the current massive infrastructure buildout in artificial intelligence (AI). From the perspective of stronger-than-expected economic activity, she indicated that AI infrastructure development seems to be exerting upward pressure on core goods inflation. With technology companies and cloud computing firms investing heavily in AI data centers, demand for chips, servers, power equipment, and other infrastructure products is rapidly increasing. Collins remarks imply that Federal Reserve officials are beginning to consider whether the AI investment boom, in addition to boosting economic growth, could also create new inflationary pressures on certain commodity prices through strong capital expenditure demand. This adds a new layer of complexity to the current policy environment facing the Federal Reserve. On one hand, recent inflation data has shown some improvements, while on the other hand, factors such as AI investment may continue to support economic activity and create new price pressures. Regarding the labor market, Collins stated that the U.S. labor market is currently in a state of "unusual balance," but this balance is not without risks. She did not change her position of supporting keeping interest rates unchanged, but emphasized that future policy will still depend on whether inflation can continue to improve. Another important market focus will be Federal Reserve Chair Waller's speech this Friday at the Jackson Hole Global Central Bank Conference. Investors will be closely watching how Waller assesses the recent cooling of inflation, the rise in long-term Treasury yields, and the possibility of further rate hikes in the future.