U.S. inflation has remained above the Federal Reserve's 2% target for nearly six years, even as the labor market shows resilience. Boston Federal Reserve President Susan Collins said she supported the 25-basis-point rate increase approved by the Federal Open Market Committee last month and believes rates may need to move "modestly higher" again this year if price pressures persist. Further tightening would affect corporate financing, bank lending rates, housing costs and consumer credit.
Collins sees continued economic resilience
Speaking at the Boston Fed's annual conference for regional and community banks, Collins said the most likely economic scenario remains one in which gross domestic product continues to grow at a healthy pace, employment stays close to full employment and inflation gradually returns to 2%. She said gains in efficiency and productive capacity are helping supply and demand move back into balance, supporting slower inflation.
Collins said the U.S. economy has remained resilient despite clear shocks from tariffs and energy prices. Strong real economic activity reflects not only firm demand, she said, but also improvements in business productivity and the economy's ability to supply goods and services.
Energy costs and investment in artificial-intelligence infrastructure could nevertheless keep adding to price pressures. Related disruptions have pushed up the cost of fuels such as diesel, while heating-oil prices are drawing attention in New England as winter approaches. At the same time, continued data-center construction has driven up costs for some parts of the construction industry.
The Fed official said policymakers need to determine whether inflation is becoming concentrated in energy and AI infrastructure, while price increases for other goods and services continue to slow. If price pressures spread across more categories, the monetary-policy challenge would become more complicated.
New England bank mergers trail last year's pace
The Boston Fed's First District covers the six New England states, excluding the portion of Connecticut that borders New York. Mutual banks account for a larger share of institutions in the region than in the country as a whole, while community banks play a significant role in local credit markets.
Collins said New England recorded 15 bank mergers in 2025, compared with five so far this year. Merger activity has picked up as regulators have taken a more open approach to approving bank combinations, but the region's peak in consolidation may have passed.
She stressed that community banks must continue providing credit and basic banking services to local businesses and households to support regional economic activity. She cited economic-development projects in New Hampshire involving large numbers of small businesses, as well as Connecticut banks that provide loans and business-planning support to childcare operators.
Compared with banks in other parts of the country, New England community banks hold a larger share of their assets in loans, including a substantial volume of residential mortgages on one- to four-unit properties. Collins said regional loan growth is slowing, but loan portfolios remain broadly healthy, with the share of nonperforming loans still below its long-term average.
As five-year loans reset in a higher-rate environment and banks continue to issue new credit, regional banks' net interest margins are gradually returning toward the average level established after the global financial crisis. Bank profitability remains relatively solid. Interest rates paid on deposits, which rose steadily over the past two years, have stabilized, while the share of core deposits has increased.
Collins also noted that New England remains a highly competitive lending market. Community banks in the region continue to post lower overall returns than national banks, a gap that has persisted for years.
AI is reshaping costs and hiring decisions
Collins said artificial intelligence has become a frequent topic in her conversations with people across New England's industries. Construction of AI data centers could lift building and energy costs, while potential productivity gains could affect the economy's productive capacity and the inflation path.
She said productivity gains at regional businesses have so far come more from process improvements than from replacing large numbers of workers with AI. With companies remaining cautious about both hiring and layoffs, she has heard little about firms planning job cuts because of AI. Some businesses are, however, taking a more cautious approach to replacing employees who leave and are looking for areas where technology can improve workflows.
For banks, AI can handle more repetitive and manual tasks, allowing employees to focus on analysis, customer service and other work requiring judgment and creativity. Whether those productivity gains translate broadly into lower costs and more stable prices will depend on how quickly companies adopt the technology and how it affects demand for labor.
Boston Fed stresses policy independence
Collins said the Boston Fed is implementing new supervisory standards proposed over the past year by Fed Vice Chair for Supervision Michelle Bowman. The Federal Reserve is also facing political pressure as it weighs its dual objectives of controlling inflation and supporting employment.
She said the Fed must preserve policy independence from political pressure in order to carry out the responsibilities assigned to it by Congress. Collins also said she values the data- and analysis-based views presented by Fed Governor Lisa Cook at FOMC meetings.
Markets will continue to track energy prices, whether AI infrastructure investment keeps pushing up costs, and whether inflation spreads from a limited number of categories to a broader range of goods and services. Those developments will shape the Fed's assessment of the interest-rate path for the rest of the year and continue to feed through to bank lending, deposit pricing and the supply of regional credit.