Key Takeaways:
Boston Fed President Susan Collins said she supported the Federal Reserve's decision last week to raise interest rates, warning that the odds of inflation staying well above the central bank's 2% target have risen. The Sept. 16 increase lifted the federal funds target range by a quarter point to 3.75%-4.00%, the first change after a stretch of unchanged policy.
"I now see an increased likelihood of future scenarios in which inflation remains notably above 2%," Collins wrote in a LinkedIn post published Sept. 22. "With the labor market on a better footing, monetary policy can focus on a timely return to price stability, especially after five and a half years of too-high inflation."
Collins, who does not hold a vote on the rate-setting Federal Open Market Committee this year, did not say whether she would back another increase. Her framing of a "somewhat more restrictive federal funds rate" as the tool that will "help ensure that inflation durably returns to target" leaves the door open to one.
The Fed's own projections point the same way. Sixteen of 18 FOMC participants expect at least one further increase before the end of 2026, and four of those see two additional hikes, according to the September projections. No increases are currently penciled in beyond 2026. Chair Kevin Warsh, who has avoided committing to a forward path, did not affirm that projection, leaving the committee's guidance resting on the dot plot rather than on the chair's voice.
The labor market read is what makes the hawkish case easier to hold. Collins described conditions as "stronger overall," and the Fed lowered its 2026 unemployment forecast to 4.1%. With employment no longer deteriorating, the argument that policy must tolerate above-target inflation to protect jobs loses its main support — the trade-off that kept cuts on the table through the first half of the year.
The complication is that the price pressure the Fed is now fighting is largely supply-driven. Collins's own framing points to shocks that tighter monetary policy cannot neutralize directly, including the economic fallout from the U.S.-Israeli war with Iran. The Fed's September projections pushed the full return to 2% out to 2029, a horizon that implies either a long stretch of restrictive policy or a persistent gap between the target and reality.
That gap is visible across the Atlantic. The European Central Bank raised its three key rates by 25 basis points on Sept. 10, taking the deposit rate to 2.50%, the main refinancing rate to 2.65% and the marginal lending facility to 2.90% — its second increase since June and its first tightening cycle in three years. Eurozone headline inflation reached 3.3% in August, the highest since September 2023, with energy inflation at 14.3% as oil moved above $100 a barrel.
The divergence among major central banks is now wide enough to matter for cross-asset positioning. The Bank of Japan lifted its policy rate by 25 basis points to 1.25%, the highest since 1995, while the Reserve Bank of New Zealand raised to 2.75%. The Bank of England held at 3.75% but split 6-3, and Brazil cut its Selic rate by 25 basis points to 13.75%. A world in which some central banks are still hiking and others are cutting is not a synchronized easing cycle — it is a set of separate inflation problems.
For rate markets, the practical effect of Collins's post is to narrow the space for near-term cuts. A policy rate held at 3.75%-4.00% with an additional hike in the projections keeps front-end yields anchored near current levels and sustains discount-rate pressure on long-duration equities, particularly growth and technology names whose valuations lean on distant cash flows. A stronger dollar follows from the same logic, which in turn tightens conditions for emerging-market borrowers and dollar-denominated commodity importers.
The historical parallel is instructive. The last time Fed officials publicly abandoned the practice of looking through supply-driven price spikes — in the 2022-2023 tightening campaign — the target range rose by 425 basis points over roughly 16 months, and the S&P 500 fell into a bear market before recovering. The current cycle is far less aggressive, but the same mechanism applies: once officials stop treating an inflation impulse as transient, the burden shifts to the rate path.
The next scheduled FOMC meeting is the immediate test. If the committee delivers the additional increase its own projections imply, the easing debate shifts into 2027. If Warsh's reluctance to guide markets prevails and the committee holds, Collins's warning becomes a minority view inside the Fed — and the repricing that followed her post would unwind just as quickly as it occurred.
This article is for informational purposes only and does not constitute investment advice.
