The Federal Reserve may have to tighten its monetary policy soon, unless inflation continues to cool, Boston Fed President Susan Collins said Tuesday.
Collins said she backed the Federal Open Market Committee's decision to maintain a "mildly restrictive" policy stance last month. That should help return inflation to the 2% target in a "reasonable amount of time," she said in an article published on the Boston Fed's website.
However, clear signs of disinflation are needed for the Fed to remain on hold, Collins, who is not a voting FOMC member this year, said. Annual consumer inflation slowed to a four-month low in July, Bureau of Labor Statistics data showed earlier this month.
"Given the many possible scenarios, policy will need to be nimble," she said. "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."
The FOMC decision to maintain the policy rate for the fifth consecutive time wasn't unanimous. Three regional Fed presidents -- Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas -- called for a hike of 25 basis points in July.
The minutes of the meeting, which were released last week, showed that Fed officials acknowledged the need for an interest rate hike if inflation does not ease.
Markets are currently pricing in a 60% probability that the Fed will keep its benchmark rate steady in September, with the remaining odds in favor of a 25-basis-point raise, according to the CME FedWatch tool.
Collins said her conversations with stakeholders across New England revealed pervasive concerns over inflation, particularly high energy prices.
"I also hear of people taking on multiple jobs to make ends meet, and more generally, of increased financial stress among lower-income households," she said.
Collins said factors including a balanced labor market and a recent rise in longer-term interest rates should help ease inflationary pressures.
"But less benign scenarios are also quite plausible," she said. "In particular, there are upside risks to inflation from both additional adverse supply shocks, and a stronger-than-expected pace of economic activity."
