Boston Federal Reserve President Susan Collins said Monday that persistent inflation and renewed pressure on energy prices justified the Federal Reserve’s latest interest-rate increase, signaling that households and businesses should not expect borrowing costs to fall soon.
The Federal Open Market Committee voted unanimously on Sept. 16 to raise its benchmark rate by a quarter percentage point, bringing the target range to 3.75% to 4%. It was the Fed’s first rate increase since 2023.
Collins told The Associated Press that she supported the decision after inflation failed to improve as much as she had expected. She also indicated that another increase could be appropriate before the end of the year if price pressures remain elevated.
“I did not see the inflation progress I was hoping to see,” Collins said.
For borrowers, the immediate consequence is a longer period of expensive credit. Credit-card rates, home-equity lines and many business loans are tied directly or indirectly to short-term interest rates. Those products can become more expensive following a Fed increase, although lenders determine how quickly and fully the change is passed along.
Small and midsize businesses may feel the pressure most sharply because they often depend more heavily on bank financing than large corporations with access to bond markets. A company considering new equipment, additional inventory or another location must now determine whether the investment will remain profitable after higher interest expenses are included.
Fixed mortgage rates do not move directly with the federal-funds rate. They are influenced more heavily by long-term Treasury yields, inflation expectations and demand for mortgage-backed securities. Even so, a central bank committed to keeping monetary policy restrictive can help hold broader financing costs at elevated levels.
Savers could benefit if banks increase yields on certificates of deposit and high-yield savings accounts. Those increases are not automatic, however, and financial institutions decide how much of a Fed rate change to pass along to depositors.
The Fed’s preferred inflation gauge shows why policymakers remain concerned. The personal consumption expenditures price index increased 3.7% in July from a year earlier, according to the Bureau of Economic Analysis. That was unchanged from June and remained well above the Fed’s 2% target.
Inflation at that level affects more than the price of individual products. When transportation, energy, insurance and raw-material costs rise, businesses must decide whether to absorb the increases through narrower profit margins, cut expenses elsewhere or charge customers more.
The Fed is particularly concerned about the third option. Repeated price increases can spread inflation from the industries initially affected by a disruption into rent, services, wages and other parts of the economy, making the problem more difficult to reverse.
The central bank said economic activity continues to expand at a solid pace, supported by resilient domestic spending, strong productivity and robust capital investment. Job growth has kept pace with the workforce, while the unemployment rate has changed little.
That resilience gives policymakers more room to focus on inflation. When employment is stable and consumers continue spending, the Fed faces less immediate pressure to support the economy with lower interest rates.
The tradeoff is that tighter credit can eventually slow hiring, construction, home sales, automobile purchases and business expansion. Higher rates discourage borrowing by raising the monthly or annual cost of financing, reducing demand throughout the economy.
Collins’ remarks therefore do not make another increase automatic. They show that policymakers are prepared to tighten further if inflation remains high while economic growth and employment continue to withstand higher borrowing costs.
Collins does not vote on the Federal Open Market Committee this year, but she participates in its discussions. Her position provides another indication that concern about persistent inflation is spreading among officials beyond the committee’s current voting members.
The practical message for businesses is to prepare for restrictive financing conditions to last longer than previously expected. Companies planning acquisitions, expansion projects or major equipment purchases may need to test those investments against higher interest costs and weaker customer demand.
Households carrying variable-rate debt have a similar calculation. Paying down expensive credit-card balances can produce greater savings when interest rates rise, while borrowers considering large purchases may need to compare financing offers more carefully.
The next major test arrives Sept. 30, when the government is scheduled to release its August personal income and inflation report. If inflation remains near current levels while employment and spending stay firm, the argument for another rate increase will become harder for Fed officials to dismiss.
JBizNews Desk | Boston
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