Federal Reserve officials warned on Thursday that elevated inflation continues to threaten economic stability, signaling that additional interest rate hikes may be necessary as long-term borrowing costs pressure housing and commercial real estate. Boston Fed President Susan Collins and Kansas City Fed President Jeff Schmid delivered the remarks during a panel at the Investing in Rural America Conference hosted by the Richmond Fed, pointing to persistent price pressures despite recent cooling trends.
Rising Long-Term Rates Strain Housing and Commercial Lending
Kansas City Fed President Jeff Schmid stated during the Richmond Fed panel that persistent inflation means the central bank has unfulfilled work ahead. Schmid noted that the rise in long-term interest rates is starting to affect credit-sensitive sectors, specifically naming multifamily housing, commercial lending, and mortgages. Long-term bond yields recently climbed to a 24-year high, driven by concerns over a strong economy, inflation, and large fiscal deficits.
Richmond Fed President Tom Barkin attributed the rising long-term yields to two primary factors: demand for bonds being issued by AI companies taking away demand for Treasury bonds, and a larger supply of Treasurys issued to finance the record U.S. fiscal deficit.
Susan Collins Warns That Inflation Remains Too High
Boston Fed President Susan Collins emphasized that price growth remains too high and labor markets sit near full employment, leaving monetary policy focused on securing a durable 2% inflation target. Collins acknowledged some promising data pieces but warned that inflation has been elevated for too long.
The warnings from central bank officials follow the release of the Personal Consumption Expenditures index for August. The Fed’s preferred inflation gauge showed core prices rising 3% annually, beating expectations of a 3.3% increase and dropping from 3.3% in July. On a monthly basis, core PCE inched down to 0.2% from July, though government calculation adjustments accounted for part of the improvement.
Neel Kashkari Expects Further Rate Increases
Minneapolis Fed President Neel Kashkari indicated that the August PCE print does not alter his economic outlook. Kashkari stated that he expects to raise rates again depending on incoming economic performance to ensure inflation returns to the 2% target. Financial markets continue to monitor incoming labor and inflation data to determine whether the Federal Open Market Committee will authorize another rate increase at upcoming policy meetings.