Boston Federal Reserve President Susan Collins indicated that the Federal Reserve may need to consider raising interest rates if inflationary pressures become more widespread in the coming months, though she currently views that outcome as less likely. In a May 13 interview, Collins expressed the expectation that inflationary effects stemming from the ongoing conflict in Iran will eventually ease, revealing a downward trend in underlying inflation.

However, Collins acknowledged that the likelihood of this benign scenario has diminished, with alternative possibilities involving more persistent and elevated inflation. She identified three key factors the central bank will monitor to assess the inflation outlook: inflation expectations among households and businesses, the potential for price increases to extend beyond energy to other goods and services, and the ongoing impact of tariffs passing through the supply chain.

Collins noted that wages do not currently represent a significant source of inflationary pressure. She also highlighted that rising inflation reduces the real, or inflation-adjusted, level of the Fed’s policy rate, effectively making monetary policy less restrictive without any adjustments by policymakers. Addressing whether this dynamic might prompt the Fed to raise rates simply to prevent a loosening of real policy conditions, Collins referred to it as “one of the things to consider” and said real interest rates merit close attention.

Nonetheless, Collins emphasized that she evaluates overall financial conditions—including but not limited to the Fed’s benchmark short-term rate—and described current borrowing conditions as having contributed to the economy’s recent resilience.

Although Collins does not hold a voting position on the Federal Open Market Committee this year, she supported the decision made at the Fed’s April meeting to remove language suggesting that the next policy move would be a rate cut. That easing bias statement had faced dissent from three Fed presidents. Collins advocated for more neutral communication going forward, linking it to the importance of maintaining the Fed’s credibility. She said the public’s inflation expectations are influenced not only by the Fed’s actual rate decisions but also by how policymakers communicate their outlook and intentions.

“How we talk about policy as well as the actual rate decisions play a role in influencing that context,” Collins stated, underscoring the connection between messaging and the central bank’s ability to anchor inflation expectations over time.