February 7, 2023

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Fed Chair supports slowdown as support mounts for lower rate action

Boston Fed President Susan M. Collins said she was leaning toward a quarter-point rate hike at the next central bank meeting — a slowdown that would signal a return to a normal pace of adjusting monetary policy after a year in which officials took swift action to slow economy and contain inflation.

Federal Reserve policymakers raised interest rates to a range of 4.25 to 4.5 percent in 2022 from near zero, a ferocious course that included four consecutive three-quarters-point adjustments. Administrators Slower An average of half a point in December, and few Several Fed regional heads have suggested in recent days that a smaller adjustment might be possible when the Fed makes its next decision on February 1st.

Ms. Collins added her voice to that chorus – but more specifically, explaining that at this point she would support a slowdown in rate adjustments of 25 basis points, or a quarter point. A more gradual policy change would give the central bank more time to see how its actions affect the economy and whether it is working to contain rapid inflation.

“I think 25 or 50 would be reasonable; I would tip at this point to 25, but it depends very much on the data,” Ms. Collins said in an interview with The New York Times on Wednesday. Make every decision as we get closer to where we will be held. Small changes give us more flexibility.”

Ms. Collins is one of 12 regional bank presidents at the Federal Reserve and among 19 policy makers. It does not have a formal vote on price changes this year, but will join the deliberations once the decision is made.

Ms Collins said she would prefer to raise rates to just over 5 per cent this year, possibly in three quarter-point moves in February, March and May.

“If we go into slower, more prudent rate increases, it could take us three rate increases to get there – and then hold out until the end of 2023, that still sounds like a reasonable outlook to me,” she said.

Higher interest rates slow the economy by making it more expensive to borrow money, affecting home purchases, business expansion, and large purchases. But the full effect takes time, so policymakers recognize that relentlessly raising borrowing costs would risk overstating their policy response: slowing growth further, and leaving more people out of work than is necessary to curb inflation.

But Fed officials also worry about underestimating it. They want to make sure they fully tame today’s rapid inflation, because allowing price increases to remain rapid for too long may cause consumers and businesses to get used to it and adjust their behavior. At this point, inflation will be an established feature of the economy, which may make it difficult to defeat.

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To balance the two risks, Fed officials are slowing interest rate increases but also pledging to keep interest rates high for some time, hoping the combination will mitigate the risk of a painful recession while reassuring investors and households that federal policymakers remain serious. About fighting inflation.

“I think the smaller increments are what the design looks like now,” Collins said.

Inflation is now beginning to slow down as commodity prices moderate and global supply chains recover. December CPI data, due for release on Thursday, is expected to show that headline inflation stalled last month compared to November, although prices continued to rise after excluding food and fuel costs.

Overall prices probably rose 6.5 percent from a year earlier, down from 7.1 percent in November, economists forecast in a Bloomberg poll.

But even as inflation slows, bringing it all back to the Fed’s target — which it defines as 2 percent using a separate but linked inflation measure — could be a challenge. Prices for a number of services have risen rapidly, and central bankers believe they could remain stubbornly high as a shortage of workers forces companies to pay more. Companies will likely try to pass these price increases on to their customers.

This is why Fed officials are looking for signs of a significant labor market slowdown, ones that have so far been elusive. Employers have continued to hire at a brisk pace in recent months, with the unemployment rate at a 50-year low and wage growth unusually strong.

The current pace of job gains is “clearly higher than what is sustainable”, Ms Collins said, explaining that it was important to see the labor market slowing across a range of measures, from salary growth to wage gains.

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But most economists expect a more pronounced slowdown in the coming months, and Fed officials are waiting to see if those expectations come true.

Mary Daley, president of the Federal Reserve Bank of San Francisco and colleague of Ms. Collins, said in an interview with The Wall Street Journal This week, it will be possible to adjust the interest rate by a quarter point or half a point at the next meeting, which indicates that it may be a good idea to slow down.

“When you rely seriously on data, doing so in incremental steps gives you the ability to respond to incoming information and account for those delays,” she said. Ms. Daly has no voting policy this year.

Federal Reserve Bank of Atlanta President Rafael Bostick, who is also a non-voter in 2023, said at a conference last week that a move of half or three-quarters of a point could be on the table, stating that he is “very open to both” depending on the data coming in. .

But Fed officials also emphasized that their fight against inflation is far from over, and that it’s important for investors to understand that, because policy changes are pouring in to affect the real economy through financial markets.

They have repeatedly emphasized that the key to the inflation dispute lies in keeping rates high for a sustainable period, not in continuing to adjust them quickly.

“We’ve really moved into the second phase of our work: Phase one, it was about aggressiveness,” Ms. Collins said Wednesday. “Now that we’re in a restricted area, I still think what I think are ‘prudent’ moves are the right way to get there.”

Ben Casselman contributed reporting.