Rate cut expectations dealt another blow: Three regional Fed presidents oppose loose rhetoric, Collins says "Next rate hike wouldn't be surprising either."

Boston Federal Reserve Chair Susan Collins said she agreed with several colleagues at last week's monetary policy meeting who raised objections to the wording of the Fed's post-meeting statement the wording implied the central bank would eventually resume cutting interest rates. In an interview, Collins said she "strongly supported" the decision to keep rates unchanged, but she also leaned towards revising the wording of the statement to make it "less closely tied to the implicit assumption that the next step will be a rate cut." Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari all supported the decision to keep rates unchanged on April 29, but opposed the expression of a "dovish tilt" in the statement. Hammack said in another interview on Thursday that she believed the FOMC statement was "somewhat misleading, at least from my current assessment of economic conditions." Collins is not a voting member of the Federal Open Market Committee (FOMC) this year. However, her views on the wording of the statement highlight the gradual shift within the FOMC away from considering near-term rate cuts. Her comments indicate that Collins is one of many officials who hope the Fed will more clearly signal that "the next move could be a rate hike or a rate cut." This dynamic will make it more difficult for Kevin Warsh, President Trump's nominee for Fed chair, to push for rate cuts after he is confirmed by the Senate in the coming weeks. Warsh is expected to take over the Fed when the policy meeting is held on June 16-17. San Francisco Fed President Mary Daly hinted in an interview on Thursday that she does not share the dissenters' position and downplayed the internal disagreements over the wording of the statement. Daly said, "I think the wording of the statement is less important than the actual actions of the Federal Reserve rate-setting committee. The real signal of the meeting is that everyone is in agreement on keeping rates unchanged." Collins said in a comprehensive interview at the Boston Fed headquarters that the conflict in the Middle East has hindered the Fed's progress towards achieving its 2% inflation target, and she tends to take a "more uncertain" stance on future rate paths. She believes rates may remain unchanged for a "longer period before being eased further." However, in certain scenarios, the Fed may also need to consider rate hikes. Collins said, "I do think there are some scenarios where we would need to think seriously about the possibility of a rate hike." But she emphasized that this is not her baseline expectation. Inflation concerns Collins has long advocated for "patience" in monetary policy and was hesitant to cut rates last fall. She said that with the inflation measures favored by the Fed rising to 3.5% in March and gas prices reaching their highest level since 2022, her concerns about price pressures have increased. Collins said, "I'm more concerned about the sustainability of inflation." She added that as the global spillover effects of the conflict continue, supply chain disruptions could lead to price increases spreading from energy to food. She believes rates should remain at the current "modestly restrictive" level. "But if the trajectory of inflation clearly moves in the wrong direction, policymakers will need to reassess the appropriate policy stance." Collins said her "baseline scenario" (most likely scenario) is for inflation to accelerate to slightly above 3.5% in the coming months, then fall to close to 3% by the end of the year. But as the conflict with Iran continues, the probability of an alternative scenario with "more serious consequences" has risen. In addition, the implementation of new tariffs some of which have been halted by the Supreme Court could also bring upward price pressures. Employment and dual mandate On the other end of the Fed's dual mandate, the April jobs report, scheduled to be released on Friday, is expected to show a slowdown in job growth, with the unemployment rate likely to remain unchanged at 4.3%, according to economists' forecasts. Collins said the labor market is showing "exceptional balance" with low unemployment but also low hiring rates. She pointed out that demand remains resilient against a backdrop of strong consumer spending. But inflation remains at the core of Collins' concerns. "One of the reasons I'm very concerned about inflation is because I realize its impact on people's lives," she said, "Price levels are already high." Collins said that combating high inflation will enable the Fed to bring about a more vibrant inclusive economy, and the labor market is showing signs of stabilization. This is a viewpoint she shared with real estate and education professionals during a day-long visit in Rhode Island on Wednesday. She heard feedback that touched on rising costs across the economy, as well as the labor market transition where artificial intelligence is replacing entry-level positions for recent graduates. Rhode Island's unemployment rate is slightly higher than the national level of 4.3%. Housing market players also pointed out signs of a "two-tiered economy" developers focusing on building luxury apartments to maximize profits, while employers noted that a lack of affordable housing is a statewide obstacle to attracting and retaining workers. "I've seen areas of strong growth, but I've also heard feedback about areas that are struggling with difficult conditions and not-so-great prospects," Collins said, "This is something we take very seriously." New York Fed President John Williams also spoke on Thursday, saying that tariffs and energy shocks have disrupted the process of inflation falling, but he pledged that the U.S. central bank will "ensure" inflation returns to target levels.