Fed’s Collins says uncertainties point to slower cuts in 2025

Federal Reserve Bank of Boston President Susan Collins said a slower approach to adjusting interest rates is merited now as officials confront “considerable uncertainty” over the US economic outlook.

Collins, in prepared remarks for an event Thursday in Boston, said the economy was in a “good place,” but noted that progress on cooling inflation will likely be slower this year than previously anticipated. The specter of new economic policies under the incoming Trump administration and new Congress may also change the economy’s trajectory, though it’s still too early to estimate exactly how that will play out, she said.

The Fed’s “policy is well positioned to adjust as required to evolving conditions – holding at the current level for longer if there is little further progress on inflation, or easing sooner if the need arises,” Collins said.

Speaking Wednesday in an interview with Bloomberg News, Collins said she favored fewer rate cuts this year than she had anticipated just a few months ago. She said her outlook for interest rates was consistent with the median projection from officials released after the Fed’s December meeting, which pointed to two quarter-point reductions this year.

Also speaking Thursday, Philadelphia Fed President Patrick Harker said he’s prepared to support additional rate cuts in 2025, but the timing will depend on what happens in the economy.

“I still see us on a downward policy rate path. Looking at everything before me now, I am not about to walk off this path or turn around,” Harker said in remarks prepared for an event in Princeton, New Jersey. “But the exact speed I continue to go along this path will be fully dependent upon the incoming data.”

Policymakers cut interest rates for a third consecutive time at their December gathering, lowering their benchmark by a quarter percentage point and bringing the total amount of reductions last year to a full percentage point. Many Fed officials have said it’s now appropriate to slow down the pace of rate cuts as inflation remains above their 2% target and the labor market healthy.

Collins, who will vote on this year’s policy decisions, said Thursday her support for the December move was a “close call.”

December Insurance

“On balance, the December cut provided some additional insurance to preserve healthy labor market conditions while maintaining a restrictive policy stance that is still needed to sustainably restore price stability,” Collins said.

The Boston Fed chief repeated that she is now less concerned about fragility in the labor market than she was in September, when policymakers kicked off their rate cutting cycle with an outsize half percentage point reduction amid worries the job market was weakening dangerously. Since then, revisions and fresh numbers have shown a return to stronger job growth.

Increased uncertainty about economic conditions and the economy’s response to policy changes typically necessitates a more cautious approach to adjusting rates, Collins repeated.

She pointed to questions over trade and fiscal policy as elements playing into a more muddied outlook, but said it’s too early to tell how new policies might impact inflation and economic activity.

“Additional information – about developments in inflation and the labor market, about possible fiscal and trade policy changes, and more – will be key to determining the appropriate course for monetary policy in the year ahead,” she said.

— By Catarina Saraiva and Christopher Anstey (Bloomberg)