Fed President Backs Slowdown as Support Mounts for Smaller Rate Move

Susan M. Collins, the president of the Federal Reserve Bank of Boston, said she was leaning toward a quarter-point interest rate increase at the central bank’s next meeting — a slowdown that would signal a return to a normal pace of monetary policy adjustment after a year in which officials took rapid action to slow the economy and contain inflation.

Fed policymakers raised interest rates to a range of 4.25 to 4.5 percent in 2022 from near-zero, an aggressive path that included four consecutive three-quarter point adjustments. Officials slowed down with a half-point rate move in December, and a few of the Fed’s regional presidents have in recent days suggested that an even smaller adjustment could be possible when the Fed releases its next decision on Feb. 1.

Ms. Collins added her voice to that chorus — but even more declaratively, making it clear that she would at this point support slowing to rate adjustments of 25 basis points, or a quarter point. Changing policy more gradually would give the central bank more time to see how its actions affect the economy and whether they were working to contain rapid inflation.

“I think 25 or 50 would be reasonable; I’d lean at this stage to 25, but it’s very data-dependent,” Ms. Collins said in an interview with The New York Times on Wednesday. “Adjusting slowly gives more time to assess the incoming data before we make each decision, as we get close to where we’re going to hold. Smaller changes give us more flexibility.”

Ms. Collins is one of the Fed’s 12 regional bank presidents and one of its 19 policymakers. She does not have a formal vote on rate changes this year, but she will join in deliberations as the decision is made.

Ms. Collins said she favored raising interest rates to just above 5 percent this year, potentially in three quarter-point moves in February, March and May.

“If we’ve gone to slower, more judicious rate increases, it could take us three rate increases to get there — and then holding through the end of 2023, that still seems like a reasonable outlook to me,” she said.

Higher interest rates slow the economy by making it more expensive to borrow money, which weighs on home buying, business expansions and other big purchases. But the full effect takes time to play out, so policymakers are conscious that relentlessly driving borrowing costs higher would risk of overdoing their policy response — slowing growth more drastically, and leaving more people out of work, than is strictly necessary to restrain inflation.

But Fed officials are also worried about underdoing it. They want to make sure that they fully tame today’s rapid inflation, because allowing price increases to remain rapid for too long could cause consumers and businesses to become used to them and adjust their behavior. At that point, inflation would be an entrenched feature of the economy, which could make it much harder to vanquish.

To strike a balance between the two risks, Fed officials are slowing down interest rate increases but also pledging to keep rates high for some time — hoping that the combination will mitigate the risk of a painful recession while assuring investors and households that Fed policymakers remain serious about combating inflation.

“I think of smaller increases as what resolute looks like right now,” Ms. Collins said.

Inflation is now beginning to slow as price increases for goods moderate and global supply chains heal, but returning it fully to the Fed’s 2 percent target could be a challenge. Prices for a number of services have been climbing quickly, and central bankers think they could remain stubbornly high as worker shortages prod companies to pay more. Firms are likely to try to pass those price increases along to their customers.

That is why Fed officials are looking for signs that the labor market is slowing notably — ones that have so far been elusive. Employers have continued to hire at a rapid clip in recent months, the unemployment rate is at a 50-year low, and wage growth is unusually robust.

The current pace of job gains is “clearly above what is sustainable,” Ms. Collins said, explaining that it is important to see the job market slow across a range of measures, from payroll growth to wage gains.

But most economists expect a more marked slowdown to take hold in the coming months, and Fed officials are waiting to see if that outlook is realized.

Mary Daly, the president of the Federal Reserve Bank of San Francisco and Ms. Collins’s colleague, said in an interview with The Wall Street Journal this week that either a quarter-point or a half-point rate adjustment would be possible at the upcoming meeting, suggesting that it might be a good idea to slow down.

“When you’re being seriously data dependent, doing it in more gradual steps does give you the ability to respond to incoming information and account for those lags,” she said. Ms. Daly does not have a policy vote this year.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta and also a non-voter in 2023, said at a conference last week that a half or three-quarter point move could be on the table, explaining that he was “very open to both” depending on incoming data.

But Fed officials have also emphasized that their fight against inflation isn’t over — and that it is important for investors to understand that, because policy changes trickle out to influence the real economy through financial markets.

They have repeatedly underlined that the key to wrangling inflation lies in keeping rates high for a sustained period, not in continuing to rapidly adjust them.

“We’ve really moved into the second phase of our work: The first phase, it was about being aggressive,” Ms. Collins said Wednesday. “Now that we’re in restrictive territory, I continue to believe that what I think of as ‘judicious’ moves are the right way to get there.”