Exclusive-Fed's Collins cautions against aggressive rate cuts given inflation issues

By Michael S. Derby

NEW YORK (Reuters) -Federal Reserve Bank of Boston President Susan Collins said on Tuesday that her outlook for monetary policy is consistent with the gradual path of easing shown in the latest central bank forecasts, in comments that framed aggressive rate cuts as risky.

The reason to refrain from swift rate cuts comes down to the ongoing threat posed by inflation, even at a time when there are signs of weakness in the job market, Collins said in an interview with Reuters in New York.

"We have to balance the risks on the inflation side," Collins said. "Are there risks on the labor market side? Yes, and I think the softening that we've seen is evidence of that," but both of those factors need to be weighed when determining interest rate policy.

Cutting rates "too quickly and certainly announcing, oh yeah, we're just going to...keep going until we get to neutral, that seems to me to be a scenario where the risks to inflation go up, and that's not consistent, I think, with following through on our mandate."

Earlier this month, the Federal Reserve trimmed its overnight interest rate target range by a quarter percentage point, to between 4% and 4.25%, while penciling in a gradual pace of cuts into the end of the year, potentially hitting between 3.5% and 3.75%. The Fed said the rate cut was aimed at reducing rising risks to the job market, while still keeping monetary policy in a place where it can help lower inflation pressures.

Fed officials have been split over where to go next on monetary policy. Collins said in a speech ahead of the interview that she supported the September easing and is open to more cuts if the data support it. Some officials like Cleveland Fed chief Beth Hammack remain very worried about inflation and lean against making short-term borrowing costs lower.

Meanwhile, Stephen Miran, a new Fed governor unusually on leave from serving in the Trump White House, dissented at the Federal Open Market Committee meeting in favor of a 50-basis-point cut. Michelle Bowman, the central bank's regulatory point person and a potential contender to succeed Fed Chair Jerome Powell when his term expires next year, is also open to aggressive easing to offset what she sees as rising risks to the job market.

In the interview, Collins noted that many aspects of inflation have moderated as officials would like, but Trump administration tariffs have pushed up key prices and it remains unclear how that will play out for price pressures. She also warned that after several years of persistently high inflation, there remains the prospect that public expectations will shift toward expecting persistent inflation gains, which should be avoided.

Collins also said the Fed faces little pressure to blast forward with rate cuts given that overall financial conditions are pretty supportive of the economy.

Some estimates suggest that "financial conditions are actually giving a bit of a tailwind in terms of economic growth, and that we're seeing that in terms of some of the activity," the official said. "It doesn't seem like to me an environment where we don't have the space... to really thoughtfully analyze economic conditions and make decisions based on what the data show."

(Reporting by Michael S. Derby; Editing by Andrea Ricci)