“Seeing sustained, broadening signs of progress should provide the necessary confidence I would need to begin a methodical adjustment to our policy stance,” Collins said in remarks to the Boston Economic Club on Wednesday.

Collins, who isn’t a voter on the rate-setting Federal Open Market Committee this year, said “it will likely become appropriate to begin easing policy restraint later this year.” She added that “a methodical, forward-looking strategy that eases policy gradually will provide the flexibility to manage risks, while promoting stable prices and maximum employment.”

The Boston Fed chief, answering questions after the speech, also said that it’s possible that the “neutral rate” — at which policy would be neither stimulating nor restraining inflation — and the medium-term trend level for bond yields is higher now than it was before the pandemic.

Collins’s desire to see more evidence of receding inflation before lowering rates aligns with comments from other Fed officials. Chair Jerome Powell has said twice in the past week that he doesn’t believe policymakers will reach the necessary level of confidence regarding inflation’s path to lower rates by the time of their March meeting. 

Read More: Mester Says Fed Should Gain Confidence to Cut ‘Later This Year’

Signs of economic softening, including reduced job turnover and a slowdown in key capital goods spending, suggest “the risks related to inflation and economic activity are coming into better balance,” Collins said in her prepared remarks.

The Fed’s preferred inflation gauge, the core personal consumption expenditures price index — which strips out volatile food and energy costs — ran at a 2.9% year-on-year pace in December. Over a six-month period, the annualized rate is just 1.9%, showcasing the Fed’s progress. Officials have said they want more such evidence to accumulate prior to cutting.

Futures trading indicates traders expect the Fed to start lowering its benchmark by June. Contracts Wednesday showed a greater than 50% chance for a cut at the May meeting.

Last year’s strong economic growth, without an escalation in inflationary pressure, indicated “favorable supply-side developments,” Collins said, citing a rebound in labor supply in part thanks to immigration, further improvement in supply-chain flows and increased productivity in some sectors.

This year, “while we may still get some positive supply-side news, a durable return to 2% inflation will likely require demand growing at a more moderate pace,” she said. “I expect this slowdown will happen, but the timing is difficult to predict, and the road may well be bumpy.”

Read More: US GDP Grew 3.3% Last Quarter, Capping Unexpectedly Strong Year

When asked about 10-year yields, Collins said that while she wouldn’t offer an outlook, there’s a “reasonable chance” over the medium term that “rates could be higher than what we’ve seen” in the past.

Collins also said that Fed officials are monitoring the evolution of private credit, which is something the central bank doesn’t have a clear “line of sight” on. Some indicators suggest a doubling over a “relatively short period of time,” she said of the volumes involved.

“While it is still a relatively small overall component” of the financial system, “anything that is growing so rapidly — evolving so rapidly — really bears watching closely,” she said.

(Updates with comments from Q&A beginning in fourth paragraph.)

More stories like this are available on bloomberg.com

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Published: 08 Feb 2024, 12:33 AM IST