Boston Fed's Collins Favors Gradual Rate Hikes as Inflation Spreads

what happened

Boston Fed President Susan Collins said she supports a gradual pace of rate increases. She said price data over the past three months and a steadier labor market suggest the rate path over the next year could be somewhat higher than she expected a couple of months ago. She stressed that the exact path will be set meeting by meeting as data comes in, given ongoing geopolitical and economic uncertainty. Collins, who is not currently a voting member of the FOMC, noted that the Fed raised rates by a quarter point to 3.75%-4.00% in September and held them steady in October.

According to Collins, inflation pressures are spreading: the October consumer price index came in hotter than expected, and core inflation rose to an annual 2.8% from 2.6% in September. She said the Fed needs to follow through on bringing inflation back to 2% and that some further tightening is appropriate. She is less concerned about jobs, pointing to October payroll gains of 165,000 and unemployment easing to 4.1%.

why it matters

The remarks signal that the Fed is leaning toward further tightening, and markets already price a December hike as close to certain. That supports the dollar and Treasury yields, while equities are more exposed to the prospect of costlier borrowing.

market impact

Dollar and Treasuries: expectations of higher Fed rates support yields and the currency

• ▲US Treasury yields pressure up — expectations of higher Fed rates over the next year lift yields
• ▲Dollar pressure up — a tighter Fed policy outlook supports the currency

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