US Economy May Need to Weaken to Get 2% Inflation

• Federal Reserve Bank of Boston President Susan Collins said on Wednesday that the U.S. economy needs to cool off as an avenue toward getting inflation back to the central bank’s 2% target. “A slowdown in activity will be needed to ensure that demand is better aligned with supply for inflation to return durably” to the official target, Collins said in remarks to be delivered at a Massachusetts Institute of Technology event.
• For now, when it comes to monetary policy, “the recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward 2%,” she said.
• The persistence of price pressures has generated considerable uncertainty over when the central bank might be able to cut interest rates. In recent appearances, many Fed officials have kept alive the prospect of an easing, but have backed off from providing any sort of period for lowering rates while they watch data for progress on lowering inflation.
• That said, getting inflation to 2% “will take more time than previously thought,” with Collins noting “There is no pre-set path for policy – it requires decisions based on a methodical, holistic assessment of wide-ranging information.”
• Collins also said in her remarks that longer-run inflation expectations have been consistent with the Fed’s 2% inflation goal, and she said that the recent jump in productivity is likely not the making of an enduring trend. Collins also said that employers are likely able to absorb higher wage demands.

(Source: Reuters)