Boston Fed's Collins Expects Second Rate Rise This Year, Then Steady in 2027

Markets are hearing that top Fed officials consider war-related energy costs as an enduring inflation factor, meaning the central bank is likely to keep tightening while oil prices stay elevated. This creates a reciprocal relationship: stronger crude prices increase the chance of more rate increases, while higher rates are designed to cool demand, which can eventually reduce fuel consumption. If energy prices continue to climb, rates traders might expect a more aggressive policy course, whereas a lasting decline in crude would challenge this hawkish narrative. The discussion about how much further rates need to rise remains unresolved, making upcoming inflation figures and energy price shifts particularly significant.

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Two Fed officials who do not vote this year cited supply shocks from the Iran war as justification for higher rates, with Goolsbee emphasizing economic hardship and Chair Warsh focusing on jobs.

The key points:

• In an interview with the Associated Press, Boston Fed President Susan Collins said the resumption of hostilities in the Middle East in August was a major factor behind her support for last week's quarter-point rate increase to roughly 3.9%.
• Collins stated she had not achieved the inflation improvements she anticipated, and she forecast another rate increase later this year, followed by rates remaining unchanged in 2027.
• Businesses in Collins' district still worry about elevated costs and many plan to transfer those to customers, she said.
• Chicago Fed President Austan Goolsbee argued that ongoing supply shocks, such as the Iran war-driven oil price increases and tariffs, give the Fed no option other than rate increases, and that this approach will be painful for the job market.
• Goolsbee's position differs from Chair Kevin Warsh's statement last week that he did not consider labor market damage necessary to achieve the Fed's goals.
• According to Goolsbee, a single additional hike might suffice if supply shocks prevail, but signs that demand—such as AI data center spending—is fueling inflation would probably require further tightening.

A senior Fed official cited the August renewal of Middle East conflict as a key factor behind her vote for last week's rate increase, the Associated Press reported. Boston Fed President Susan Collins agreed with the central bank's Wednesday decision to raise its benchmark rate by a quarter point to roughly 3.9% and projected another hike later this year. She anticipates the Fed will keep rates unchanged in 2027.

Collins reported she had not observed the inflation improvement she desired and warned that geopolitical events could continue to push energy prices higher. She noted a greater probability of outcomes where inflation remains above the Fed's 2% goal, a level not attained in over five years. She added that companies in her district—spanning Massachusetts, Connecticut, Maine, Rhode Island, and Vermont—are still anxious about high expenses and many plan to shift them to consumers, potentially boosting recorded inflation.

Speaking in London on Monday, Chicago Fed President Austan Goolsbee presented a sharper interpretation of the trade-off, according to AP. He argued that persistent supply shocks—such as higher oil prices from the Iran conflict and tariffs—force the Fed into rate increases, even though it normally would wait for such disruptions to subside. He believes higher rates are necessary to close the supply-demand gap, which would push employment below its potential and cause hardship. This contrasts with Fed Chair Kevin Warsh's remark last week that he did not think the labor market needed to be damaged to achieve the Fed's aims. AP noted that during the aggressive rate increases of 2022 and 2023, inflation declined without a substantial rise in joblessness.

Goolsbee also indicated that the Fed might require more than the single additional hike that policymakers collectively projected last week. He pointed to indications that AI-driven data center investments are contributing to inflation, suggesting both strong demand and the oil supply shock. If inflation is primarily supply-driven, one more increase might suffice, he said, but if demand is the cause, more would likely be needed. Neither Collins nor Goolsbee have voting power on rate decisions this year, though they participate in meetings. Goolsbee gains a vote next year, while Collins will vote in 2028.

Goolsbee delivered his remarks in London on Monday.