Fed signals another rate increase before year-end as inflation risks persist

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Fed signals rate hike ahead

Highlights

Boston Fed President Susan Collins expects another rate hike before year-end, following the recent increase to a 3.75%-4.00% range.
Collins cites healthy GDP growth and a near-full employment labor market, anticipating gradual disinflation toward the 2% inflation target.
Persistent inflation risks remain from technology investment in AI, tariffs, and higher energy costs, keeping inflation above target in the coming months.

Collins outlines case for further tightening

As reported by Reuters, Collins says she supported last month's quarter-point increase and currently expects it will be appropriate to raise rates a bit further before the end of the year to help return inflation to the Federal Open Market Committee's 2% target in a timely and durable way.

In remarks prepared for a banking conference at the Boston Fed, she says her view on whether additional action is needed, and when it should come, depends heavily on how incoming data shape her outlook and the associated balance of risks. The Fed lifted its policy rate last month to a 3.75% to 4.00% range.

Policymaker projections released at that meeting point to another increase by the end of 2026. A range of Fed officials in recent weeks have suggested that any further move is more likely in December than at the Oct. 27-28 meeting.

Growth backdrop and price pressures

Collins is broadly upbeat about the economic outlook, saying the most likely path still features healthy GDP growth and a labor market near full employment. In that scenario, inflation gradually returns to 2% as efficiency gains help improve the balance between demand and supply and contribute to disinflation.

She also flags risks that could complicate that process, including pressure from technology investment tied to AI infrastructure, as well as tariffs and higher energy costs linked to the war in the Middle East. Collins adds that both headline and core inflation are likely to remain above the Fed's 2% target in the coming months after a recent jump in prices for refined energy products such as jet fuel, diesel fuel and home heating oil.

In our earlier coverage of AI-driven inflation risks, we explained that the boom in AI data center investment is starting to push price pressures beyond the immediate tech supply chain and into the wider economy. We also noted that this demand-led inflation dynamic could complicate the Fed’s path back toward rate cuts and keep policymakers focused on the risk of overheating if incoming data do not show clearer disinflation.

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