The slowing of inflation must broaden out to other sectors before it will be appropriate to ease policy, Boston Fed President Susan Collins said Wednesday.
“What would I need to see in the data to determine when it will be appropriate to ease policy?” Collins asked in a speech at the Tuck School of Business at Dartmouth College.
“Expecting all data to speak uniformly is too high a bar. Still, it will be important to see sustained, broadening signs of progress” toward low inflation and healthy labor markets, she answered.
In particular, Collins said she wanted to see continued declines in housing and non-shelter services inflation, two subcomponents that have been sticky.
Still, Collins said she was a “realistic optimist” that the economy is on a path back to 2% inflation without damaging the labor market. Progress will be “bumpy,” she said.
Collins said she saw signs of slowing demand in the economy, which she said was welcome to reduce price pressures. But there is a lot of uncertainty about when and how much, growth is likely to slow.
Signs of stress on consumers are rising and firms are becoming interest sensitive in their capital spending. Despite recent hiring strength, the labor market is “normalizing” or slowing down, Collins said.
Overall, Collins said she agreed with her Fed colleagues that it will likely be appropriate to begin cutting rates “later this year.”
After that, Susan said that gradual reductions in rates would be the best course of action.
“A methodical, forward-looking approach to reducing rates gradually should provide the necessary flexibility to manage risks, while promoting stable prices and maximum employment,” Collins said.
Fed officials have penciled in three rate cuts this year.
Traders in derivative markets now expect the first rate cut in June, according to the CME’s FedWatch tool. The traders only expect three cuts this year, down from expectations of six cuts earlier this year.
