Boston Fed President Susan Collins voiced support for last week's interest rate hike and cautioned that the probability of inflation running "persistently and materially above 2%" is increasing, underscoring the need to sustain restrictive monetary policy.

In a post published on a social platform Tuesday, Collins stated she backs the Federal Reserve's decision to raise rates last week, warning that inflation could significantly exceed the central bank's 2% target in the future. She noted that the likelihood of "inflation persisting well above 2%" is on the rise, adding that with the U.S. having already experienced over five years of above-target price growth, a more cautious approach to maintaining tight monetary policy is essential to bring inflation back to goal sustainably.

Policymaker's hawkish signals reinforce recent Fed stance

Her remarks further solidified the hawkish signals the Fed has recently communicated. Last week, the Federal Reserve increased the federal funds rate target range by 25 basis points to 3.75%-4.00%, marking the first rate hike since 2023. Policymakers simultaneously projected that another rate increase could still occur later this year.

Sticky inflation re-emerges as core concern

Collins explained that one key reason for supporting the hike was that previous progress on disinflation had fallen short of expectations. While she acknowledged some recent improvements in the labor market, price pressures remain persistent, requiring the Fed to prioritize ensuring inflation returns to target levels.

The current policy environment facing the Fed is increasingly complex. On one hand, U.S. economic activity retains a degree of resilience, with consumption and corporate spending not showing significant cooling. On the other hand, energy prices, geopolitical conflicts, and supply chain disruptions could reignite inflationary pressures. Collins argued that under these conditions, simply waiting for inflation to ease on its own carries risks.

She specifically highlighted that recent geopolitical factors have elevated upside risks to energy prices. Tensions between the U.S. and Iran have fueled volatility in energy markets, with oil prices briefly returning to the $100-per-barrel level, increasing the possibility of a fresh inflation surge.

This assessment aligns closely with views expressed by other Fed officials recently. Chicago Fed President Austan Goolsbee indicated that supply shocks such as energy and tariffs may not dissipate quickly and could transmit through corporate costs to affect the broader price system.

In past years, the Fed typically treated energy price shocks as temporary disruptions, believing monetary policy should not overreact to supply-side factors beyond its direct control. However, recent comments from officials suggest that as high inflation persists for longer, policymakers are becoming less tolerant of "transient shocks." Collins stated that if supply shocks keep inflation above target for an extended period, the Fed must ensure policy is tight enough to prevent inflation expectations from drifting upward again.

At present, the Fed's policy path remains subject to divergence. Some market participants had previously anticipated that the central bank could pivot toward easing as inflation cooled, but recent official communications indicate that decision-makers are more focused on the risk of inflation re-accelerating.