By Howard Schneider
WASHINGTON, Aug 25 (Reuters) – The U.S. Federal Reserve will need to raise interest rates soon unless coming data show a continued decline in inflation that remains too high and which has become a “pervasive” concern for businesses and households, Boston Fed President Susan Collins said on Tuesday.
Collins said in comments posted to the Boston Fed website that the current Fed policy rate, under her base case outlook, will continue to push down prices and help with a “gradual disinflation” aided also by the recent rise in longer-term bond yields and other factors.
But “should evidence of sustained inflation progress not materialize, I believe it will be appropriate to tighten policy soon to ensure we deliver price stability in a reasonable time frame. … Concerns about high prices are pervasive in my conversations with stakeholders across New England,” Collins wrote.
Economists polled by Reuters expect that new inflation data on Wednesday will show that the Personal Consumption Expenditures price index, excluding food and energy, increased at a 3.3% annual rate in July, unchanged from the month before and well above the Fed’s 2% target. Core PCE, considered a guide to future headline inflation, has risen steadily since last year, with Fed officials citing the Trump administration’s import tariffs, higher oil prices due to the war with Iran, and now massive investments in artificial intelligence as reasons for the increase.
The Fed’s policy rate, currently in the 3.5% to 3.75% range, has been on hold since December as officials waited for inflation to ease.
Collins said she still thinks that may happen, but, with inflation above target for more than five years now, she also said the Fed cannot wait forever, and is concerned that further time missing the inflation goal could shift consumer expectations in a way that makes the inflation goal harder to achieve.
Fed Chairman Kevin Warsh speaks on Thursday in a much-anticipated keynote address to the central bank’s annual research symposium in Jackson Hole, Wyoming, remarks that come amid division on the Fed about the need for rate hikes, and a rise in U.S. Treasury yields.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama and Mark Porter)
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