Inflation likely to spark more rate hikes: Boston Fed's Collins

Expert quote:  "I see the strength in real economic activity as reflecting not just strong demand but also an increase in the economy's productive capacity due to efficiency gains." – Susan Collins

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Data point: In 2025, there were 15 bank mergers in New England; this year, there have been five so far, Fed data shows.

BOSTON —While the U.S. economy is showing "resilience," especially with regard to a low unemployment rate, inflation is coming up on six years above the Fed's two percent target, necessitating higher interest rates to bring it down, Susan Collins, president of the Federal Reserve Bank of Boston, said.

Speaking at the Boston Fed's annual conference for regional and community banks, Collins said she supported the Fed Open Market Committee's 25-basis-point rate hike last month and feels the central bank will have to raise "a bit further" by year's end to tame inflation. 

Collins said that the most likely economic scenario, according to her reading of the data, "continues to feature healthy GDP growth, with the labor market remaining near full employment. In this scenario, inflation gradually returns to two percent, as continued efficiency gains support the balance between demand and supply, and contribute to disinflation."

The U.S. economy has shown resilience despite significant adverse shocks from tariffs and energy, she said. 

"I see the strength in real economic activity as reflecting not just strong demand but also an increase in the economy's productive capacity due to efficiency gains," Collins said.

However, with pressure on pricing from the war with Iran, which has driven up costs for fuels like diesel and, crucially for New England as winter approaches, home heating oil, inflation is likely to continue growing, she said. Another issue is the drumbeat of spending on data centers for artificial intelligence, which has driven up construction costs. 

"Against this backdrop, it will be important to monitor whether elevated inflation remains largely confined to energy and AI-buildout-related categories, while price growth continues to moderate elsewhere – or whether evidence of price pressures broadens," she said. 

In a separate interview with American Banker, Collins said she looks to surveys and other data sources within and outside the Fed to inform her economic outlook, and relies particularly on meeting with individuals in the business and banking sectors in her district. 

"I'm talking to folks from a wide range of contexts, age groups and sectors, from all across New England," she said. "I very frequently hear that widespread concern about the high cost of a variety of things."

How New England's economy is faring

The Fed's First District, which encompasses all six New England states except for the part of Connecticut bordering New York, has more mutual banks than is typical across the country. Although the banking sector has seen a pickup in mergers and acquisitions as Trump administration regulators have shown more willingness to approve combinations, the peak might have already happened. Bank earnings are stronger now than last year, and there have only been five bank mergers in the region, compared to 2025, which saw 15 mergers here, Collins said. 

Collins stressed the importance of community banks continuing to provide credit and banking services to grow the local economy. She cited New Hampshire economic development projects involving the smallest businesses, as well as Connecticut banks providing credit and strategy help to childcare-facility owners. 

Compared to other banks across the country, New England community banks have a higher proportion of their assets in loans, specifically residential loans for one- to four-family homes, she said. Banks in the region are seeing slower loan growth, but loans are performing well, she said, citing non-accruals to total loans staying below the long-term average. As loans with five-year rate terms have begun to reprice in today's higher rate environment, and as banks make new loans, local banks' net interest margins are coming back to their averages from after the global financial crisis, she said. 

Banks now are posting strong earnings, the interest rates banks pay on interest-bearing accounts have stabilized after rising over the past two years, and core-deposit ratios are up, she said. 

"New England remains a highly competitive lending environment, and overall returns for community banks in the region remain below those of national peers, continuing a long-term pattern," she said.

AI's role in the economy 

One major question for the local and national economy is the role of AI, not only in data-center construction as fuel for inflation, but also for increased productivity and in hiring decisions. 

"Increasingly, AI is part of every conversation I have across the district," Collins said in the interview. She said regional companies are mostly getting productivity gains from process enhancements, not necessarily from replacing workers with more-efficient AI: "Consistent with a low-hire, low-fire environment, I rarely hear firms thinking about downsizing as a result of using AI, but they may be thinking more carefully about backfill and places they could improve." 

Banks in particular have the chance to turn more repetitive or manual tasks over to AI, freeing employees to do more forward-thinking or creative tasks, she said. 

Supervision and Fed independence

Collins pointed out that her bank is applying the new supervision standards that Fed Gov. Michelle Bowman, the vice chair for supervision, set out in the last year. 

As it deals with fighting inflation and boosting employment, the Fed is also facing attacks from President Donald Trump, who is currently battling to remove Fed Governor Lisa Cook from office. In the interview, Collins noted that she feels the Fed needs to maintain its independence from political pressure if it's going to meet Congressional mandates. 

"I really value Gov. Cook's thoughtful perspectives and data-based analyses around the FOMC table," she said.