The Fed president favors a delay as support grows for a lower interest rate move

Susan M. Collins, president of the Federal Reserve Bank of Boston, said she favored a quarter-point rate hike at the central bank’s next meeting — a delay that would signal a return to the normal pace of monetary policy adjustment in a year’s time , in which the authorities took swift action to slow the economy and curb inflation.

Fed policymakers have raised interest rates to a range of 4.25 percent to 4.5 percent in 2022 from near zero, an aggressive path that has included four consecutive three-quarter point adjustments. Officials funny with the interest rate moving by half a point in December and a few of the Fed’s regional presidents in recent days have suggested that an even smaller adjustment could be possible when the Fed publishes its next decision on February 1.

Ms. Collins added her voice to that chorus — but more emphatically, making it clear that at this point she would support a delay to rate adjustments of 25 basis points, or a quarter of a point. Changing policy more smoothly will give the central bank more time to see how its actions are affecting the economy and whether they are working to curb runaway inflation.

“I think 25 or 50 would be reasonable; At this point, I would go with 25, but it depends a lot on the data,” Ms. Collins said in an interview with The New York Times on Wednesday. “Slow correction allows more time to evaluate the input before making any decisions as we get closer to what we’re going to keep.” Smaller changes give us more flexibility.”

Ms. Collins is one of the Fed’s 12 regional bank presidents and among 19 policymakers. It does not have a formal vote on interest rate changes this year, but will join the debate when a decision is made.

Ms Collins said she supported raising interest rates to just above 5 per cent this year, potentially by three-quarters of a point in February, March and May.

“If we’ve moved to slower, more reasonable rate hikes, it might take us three rate hikes to get there — and then continue until the end of 2023, that still seems like a reasonable outlook to me.” “, she said.

Higher interest rates slow the economy by making it more expensive to borrow money, which weighs on home buying, business expansion and large purchases. But the full effect takes time to play out, so policymakers are aware that a relentless increase in borrowing costs would risk overdoing the policy response: slowing growth more dramatically and putting more people out of work than strict necessary to curb inflation.

But Fed officials also worry that they don’t. They want to make sure they fully tame today’s runaway inflation, because allowing price increases to remain rapid for too long could cause consumers and businesses to get used to them and adjust their behavior. At that point, inflation will be an ingrained feature of the economy, which can make it much harder to defeat.

To strike a balance between the two risks, Fed officials are slowing raising interest rates but also vowing to keep rates high for some time, hoping the combination will mitigate the risk of a painful recession while ensuring investors and households, that Fed policymakers remain serious about fighting inflation.

“I think at the moment the determination seems to be smaller increases,” Ms Collins said.

Inflation is now beginning to moderate as commodity price increases moderate and global supply chains recover. Consumer price index data for December, scheduled for release on Thursday, is expected to show headline inflation stalled last month compared to November, although prices are likely to continue rising after stripping out food and fuel costs.

Overall, prices likely rose 6.5 percent from a year earlier, down from 7.1 percent in November, economists in a Bloomberg survey predicted.

But even as inflation slows, getting it back fully to the Fed’s target — which it defines as 2 percent using a separate but related measure of inflation — could be challenging. Prices for a range of services are rising rapidly, and central bankers believe they may remain stubbornly high as labor shortages force companies to pay more. Firms are likely to try to pass these price increases on to their customers.

That’s why Fed officials are looking for signs that the labor market is slowing significantly, ones that have so far been elusive. Employers have continued to hire at a brisk pace in recent months, the unemployment rate is at a 50-year low and wage growth has been unusually strong.

The current rate of job growth is “clearly above what is sustainable,” Ms. Collins said, explaining that it was important for the labor market to slow on a number of metrics, from wage growth to wage gains.

But most economists expect a more noticeable slowdown to linger in the coming months, and Fed officials are waiting to see if that prospect materializes.

Mary Daly, president of the Federal Reserve Bank of San Francisco and a colleague of Ms. Collins, said in an interview with The Wall Street Journal this week that a quarter-point or half-point rate adjustment would be possible at the upcoming meeting, suggesting it might be a good idea to hold off.

“When you’re heavily data-dependent, doing it in more incremental steps really gives you the ability to react to incoming information and account for those delays,” she said. Ms. Daly has no policy vote this year.

Rafael Bostick, president of the Federal Reserve Bank of Atlanta and also a non-voter in 2023, told a conference call last week that there could be a move of half or three-quarters of a point, explaining that he was “very open to both” depending on the incoming data.

But Fed officials also stressed that their fight against inflation is not over, and that it is important for investors to understand that as policy changes trickle down to affect the real economy through financial markets.

They have repeatedly emphasized that the key to fighting inflation lies in maintaining high levels for an extended period of time, not continuing to correct them quickly.

“We’ve really entered the second phase of our work: The first phase was to be aggressive,” Ms. Collins said Wednesday. “Now that we’re in restrictive territory, I continue to believe that what I consider ‘sensible’ moves are the right way to get there.”

Ben Casselman contributed reporting.

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