Federal Reserve’s Outlook on Inflation and Interest Rates

By Howard Schneider and Ann Saphir

Jackson Hole, Wyoming (Reuters) – Boston Federal Reserve President Susan Collins on Thursday expressed confidence that the U.S. central bank can reduce inflation without triggering a recession and indicated her support for initiating interest rate cuts next month.

“I think there’s a clear path to achieving our goals without an unneeded downturn, and with a labor market that continues to be healthy,” Collins stated in an interview with Reuters at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.

Collins emphasized the importance of maintaining a healthy labor market while bringing inflation down, suggesting that now may be the right time to begin easing monetary policy.

The Fed is broadly anticipated to initiate rate cuts at its policy meeting on September 17-18, marking a significant moment in the battle against inflation. The central bank quickly raised its policy rate in 2022 and 2023 and has maintained it within the 5.25%-5.50% range since July of last year. Inflation, according to the Fed’s preferred measure, was at an annual rate of 2.5% in July, still above the 2% target but significantly lower than the peak of around 7% seen two years ago.

Although Collins did not specify whether the Fed would consider a half-percentage-point rate cut over a typical quarter-point reduction, her focus on a healthy labor market and a call for a “gradual, methodical” approach to policy adjustments suggest a preference for a smaller decrease in borrowing costs.

Collins noted potential risks, such as a “self-fulfilling” spiral into economic weakness if the perception develops that the U.S. labor market is cooling too rapidly.

“It’s important to talk about the range of data that we’re seeing which demonstrate an overall healthy labor market,” she remarked, pointing out that job vacancies have decreased, with the slowdown in job gains largely resulting from reduced hiring rather than increased layoffs, and that the unemployment rate remains low at 4.3%.

Collins concluded by stating, “The orderly rebalancing we’ve seen has been encouraging and very helpful overall, and a gradual methodical approach to revisiting our policy stance over time I believe will continue to be appropriate. We’re well positioned and… preserving that healthy labor market as we continue to bring inflation down is important.”