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Boston Federal Reserve President Susan Collins has indicated that the war in Iran is exacerbating energy price pressures, adding to the financial strain on American households, particularly those with middle and low incomes. She warned that if inflation does not show clear signs of cooling, the U.S. central bank may need to tighten monetary policy again.
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Collins highlighted the persistent burden of high prices on businesses and families in the Northeast region during an interview with the Financial Times. The U.S. inflation rate has remained above the Fed's 2% target for over five consecutive years. "In every conversation, I hear complaints about prices, in various forms," Collins said while discussing interactions with businesses at the Boston Fed headquarters. She added that among middle and low-income households, she increasingly hears about challenges in making ends meet, noting that energy prices are particularly troublesome, especially in their region.
The New England area's reliance on heating oil for winter and as a backup fuel for electricity generation makes it especially vulnerable to crude oil price hikes. Collins' remarks came on Tuesday, just one day before the release of July's consumer price index, a report that will directly influence market expectations for the Fed's September policy meeting.
Energy supply disruptions caused by the Trump administration's war with Iran have significantly reduced oil shipments through the Strait of Hormuz. Additional price pressures stem from tariffs and rising costs linked to artificial intelligence infrastructure spending. U.S. consumer price inflation rose from 2.4% in February to 4.2% in May, marking a three-year high. It dipped to 3.5% in June as fuel costs fell, but recent increases at the pump have introduced significant uncertainty for the July data.
Following the Fed's decision to hold interest rates steady last month, concerns about inflation risks have not dissipated. Three policymakers voted against the decision, advocating for an immediate rate hike. Collins, who currently does not have a voting seat on the Federal Open Market Committee, supported the rate pause in July. She views current rates as "moderately restrictive" and sufficient to anticipate a "gradual and sustained" disinflation. However, she has made it clear that she is prepared to support a rate increase in September if future data warrants further tightening. "I do think economic conditions in the coming months may require tighter policy, and I am willing to support a rate hike in that scenario," Collins stated.
A Bloomberg survey shows economists expect July's consumer prices to rise 3.4% year-over-year, slightly below the previous month. Core inflation, excluding food and energy, is forecast to fall from 2.6% to 2.5%. Even so, inflation remains well above the Fed's 2% target. The central bank's preferred measure, the personal consumption expenditures price index, rose 3.7% in June from a year earlier and has exceeded the policy goal since early 2021.
Collins is not the only Fed official signaling a potential rate hike. The three policymakers who voted for a rate increase in July—Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari—have all warned that the longer inflation stays elevated, the harder it becomes to manage. Three Fed governors—Lisa Cook, Philip Jefferson, and Christopher Waller—have also indicated they might support a 25-basis-point rate hike in September if inflation does not cool sufficiently. New York Fed President and FOMC Vice Chair John Williams similarly hinted he would back higher borrowing costs if inflation remains high. Last week, the Financial Times reported that Fed Chairman Kevin Warsh might also support a rate hike if upcoming economic data suggests higher borrowing costs are needed. Current investor pricing suggests about a 50% probability of a 25-basis-point rate hike at the mid-September meeting.
The labor market's weakness adds another layer of complexity for the Fed. Last week's July nonfarm payrolls report showed an unexpected drop of 23,000 jobs, leading markets to reduce expectations for a near-term rate hike. Over the past three months, the U.S. has added an average of only about 20,000 jobs per month, well below the first-quarter average of 73,000. The labor market remains in a stalemate with low hiring and low layoffs. Nonetheless, Collins cautioned against relying too heavily on a single month's employment data to assess the labor market. She noted that private-sector hiring is still positive and spread across multiple industries, and the unemployment rate remains "relatively stable." "Given the high volatility of monthly employment data and the slowing growth in labor supply, I have long said we should not be surprised if we see periods of negative job growth followed by periods of surprisingly high growth," she said. While acknowledging that current labor market data is "quite mixed" and in an "unusual balance," Collins believes policymakers still need to focus primarily on inflation. "There is indeed much to watch, but inflation remains too high," she concluded.
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