Susan M. Collins. Photo courtesy of Federal Reserve Bank of Boston.

While inflation has come down from the 9.1 percent peak in June 2022, the president of the Federal Reserve Bank of Boston believes that inflation still remains too high and that policymakers are keeping an eye on price stability as it plays out over time.

The Federal Reserve’s interest rate-setting Federal Open Market Committee declined to raise its benchmark interest rate for the second meeting in a row this week, but “further tightening is certainly not off the table,” Susan Collins, president of Boston Fed, said a speech to the Maine Bankers Association’s annual convention, according to prepared remarks released to the press.

She said policymakers will “stay the course” in bringing down inflation to the Fed’s 2 percent target, but cautioned that this phase of policymaking “requires considerable patience” as the central bank tries to extract signals from “noisy data” and allow temporary factors to play out.

“The risk of inflation remaining persistently high must be weighed against the risk that activity will slow more than expected. I also recognize the potential for higher short-term rates to place more pressure on some banks’ balance sheets and reduce bank credit provision more than I anticipate,” Collins said.

In trying to bring down inflation, Collins said she is realistic about uncertainties and risks, while being an optimist that price stability “can be restored with an orderly slowdown in activity, and only a modest unemployment rate increase associated with supply and demand in labor markets”.

“The ongoing resilience I see in the economy and the progress on inflation so far lead me to believe that the pathway to achieving this desirable outcome has widened. Policy remains well positioned to proceed cautiously in this uncertain economic environment, recognizing and balancing the risks while remaining resolute and data-dependent, with the flexibility to adjust policy appropriately as conditions warrant,” she added.

Inflation data has come down to 3 percent in June, before going slightly up again to 3.2 percent in July and 3.7 percent in August. Collins said that most of the decline came from the prices of goods, but the inflation from “core services excluding shelter – comprising over half of the Fed’s preferred inflation measure – has yet to show improvement consistent with price stability.”

Shelter inflation, on the other hand, has moderated recently, and will likely to ease further, the Boston Fed president said.

“Price stability is essential for a well-functioning economy, and an important precondition for maximum employment that is sustainable over time – so reducing inflation relates to both parts of our dual mandate from Congress,” Collins said.