Boston Federal Reserve Chairman supports keeping interest rates unchanged for the time being and warns that if inflation does not continue to cool down, interest rates may need to be raised soon

The Zhitong Finance App learned that Boston Federal Reserve Chairman Collins said on Tuesday that she still supports the Federal Reserve keeping interest rates unchanged, but this position has a clear premise, that is, we need to see more evidence that inflation continues to fall back to the 2% target in the future. If the improvement in inflation does not continue, she believes the Federal Reserve may need to tighten monetary policy even further soon.

Collins said in an article published by the Boston Federal Reserve on the same day: “Maintaining the current federal funds rate target range requires continued evidence that inflation is indeed declining. If there is no sustained improvement in inflation, I think it would be appropriate to tighten policy soon.”

The Federal Reserve's next monetary policy meeting will be held in Washington from September 15 to 16. As the September meeting approaches, differences within the Federal Reserve over whether further interest rate hikes are needed are being closely watched by the market.

Collins said that recently released inflation data shows that potential price pressure has eased. This change is “slightly encouraging,” but she also cautioned that monthly inflation data is usually highly volatile, and it is uncertain whether recent improvements will continue.

The Federal Reserve kept interest rates unchanged at the July policy meeting, but there are already clear internal differences over the next policy direction.

At the time, three Fed policymakers advocated raising interest rates by 25 basis points, reflecting growing concerns that continued higher than target inflation might require further policy tightening. In addition, two other regional Federal Reserve officials who did not have the right to vote this year said they also support interest rate hikes.

Collins also did not have the right to vote in the Federal Open Market Committee (FOMC) this year. She said she supports the Federal Reserve's decision to keep interest rates unchanged in July.

She believes that policy interest rates, which are still limited, and the recent marked rise in long-term US bond yields will help tighten the financial environment, thereby easing some of the inflationary pressure brought about by strong consumption by households and businesses.

At the same time, she expects that the impact of the previous tariff increase on commodity prices has basically been released, and that the driving effect of rising oil prices on inflation should gradually weaken in the future.

If these factors develop as expected, the Federal Reserve may have more time to watch the trend of inflation without immediately raising interest rates further.

However, Collins also warned that an even worse situation is “entirely likely” to occur. She said that new negative supply shocks and stronger than expected economic activity may pose an upward risk of inflation.

Notably, Collins specifically mentioned the current large-scale construction of artificial intelligence infrastructure. She said that judging from the risk that economic activity is stronger than expected, AI infrastructure construction seems to be putting upward pressure on core commodity inflation.

As technology companies and cloud computing companies invest heavily in AI data centers, demand for chips, servers, power equipment, and other infrastructure products is rapidly increasing. Collins's statement means that Fed officials are beginning to pay attention to whether the AI investment boom, in addition to boosting economic growth, may also put new inflationary pressure on some commodity prices through strong demand for capital expenditure.

This has also added new complexity to the current policy environment facing the Federal Reserve. On the one hand, recent inflation data has improved somewhat; on the other hand, factors such as AI investment may continue to support economic activity and create new price pressure.

In terms of the job market, Collins said that the US labor market is still in an “unusual balance,” but this balance is not without risk.

As a result, she did not change her current position in support of keeping interest rates unchanged, but stressed that future policies will still depend on whether inflation can continue to improve.

Another important focus of the current market will be Federal Reserve Chairman Walsh's speech at the Jackson Hole Global Central Bank Annual Meeting this Friday. Investors will pay close attention to how Walsh assesses the recent cooling in inflation, the rise in long-term US bond yields, and the possibility of further interest rate hikes in the future.