Fed Hikes for First Time Since 2023, Collins Flags Higher Inflation

The Fed's first rate hike in three years met warnings from Boston Fed's Susan Collins that inflation could stay notably above the 2% target.

The Federal Reserve raised its benchmark interest rate by a quarter percentage point to a range of 3.75% to 4% last week, the central bank's first rate hike in more than three years. Chairman Kevin Warsh said the move was designed to remove a "dose of accommodation" from the economy, and policymakers penciled in another increase before the year is out, though Warsh did not personally affirm that projection. University of St. Thomas economist Tyler Schipper, speaking to KARE 11 and WCCO Radio, called the hike "a bitter pill" — like taking medicine to feel better later — that brings short-term pain for borrowers while aiming to slow demand and keep prices in check.

In a LinkedIn post on Tuesday, Boston Fed President Susan Collins said she supported the hike but sees "an increased likelihood of future scenarios in which inflation remains notably above 2%." "A somewhat more restrictive federal funds rate will help ensure that inflation durably returns to target," she wrote, adding that policy can focus on price stability "especially after five and a half years of too high inflation." Collins, who is not a voting FOMC member this year, told the Associated Press she is among policymakers projecting one more increase this year and expects rates to hold unchanged in 2027.

Collins argued that labor market conditions seem "a bit stronger overall" and the unemployment rate remains low, giving monetary authorities room to prioritize stabilizing consumer prices without triggering immediate economic distress. That buffer is what allows the Fed to shift its focus away from employment and back to its 2% inflation goal. Schipper offered the consumer-side argument for the tradeoff: right now inflation is running higher than wages, so people's real budgets were shrinking even before the hike, and the goal is for wage growth to outpace inflation so real incomes turn positive again.

The pain from tighter policy lands unevenly. Schipper told WCCO Radio that he is "particularly sympathetic" to lower-income people who have put money on their credit cards, since higher rates will make those payments harder — while people who can pay cash for a car or house are largely unaffected. For everyone else, the takeaway is that officials are openly considering another hike this year, which keeps borrowing costs on mortgages, cards, and loans elevated, and savings yields in flux, as the outlook evolves.

Collins' comments chimed with those of European Central Bank executive board member Philip R. Lane, who said Tuesday that a "second wave of rising energy prices" is likely to keep inflation "higher for longer." Lane told Swiss daily Le Temps that the ECB forecasts upward pressure on food, energy including electricity, and goods in general, though the oil and gas futures curve points to some resolution later this year. Reuters notes a further complication for the Fed: much of the upward drift in U.S. price pressures comes from supply shocks, such as the US-Israeli war with Iran, which tighter monetary policy struggles to counter.

Markets are broadly split on whether the Fed hikes again at the October FOMC meeting, with 53.1% expecting another 25-basis-point increase according to CNBC, citing CME Group's FedWatch tool. CNBC also reports St. Fed officials voted unanimously for last week's move, and the median projection points to one additional quarter-point hike this year. With supply-driven price shocks proving persistent, officials have moved away from looking through what would once have been seen as transient inflation hits.