Boston Fed President Susan Collins stated on Tuesday that she currently supports the Federal Reserve holding interest rates steady, but this stance carries a clear condition: more evidence is needed to confirm that inflation is sustainably moving toward the 2% target. If inflation improvements fail to persist, she believes the Fed may need to tighten monetary policy further in the near term.

In an essay published by the Boston Fed that day, Collins said, "Maintaining the current federal funds rate target range will require sustained evidence that inflation is indeed declining. If sustained inflation improvement does not materialize, I believe a near-term tightening of policy would be appropriate." The Fed's next monetary policy meeting is scheduled for September 15-16 in Washington. As that meeting approaches, market attention is focused on growing internal divisions over whether further rate hikes are necessary.

Collins noted that recent inflation data shows underlying price pressures have moderated, a shift she described as "somewhat encouraging," but she cautioned that single-month inflation readings are often volatile and it remains uncertain whether recent improvements can be sustained. The Fed held rates steady for a second consecutive meeting in July, but clear disagreement has emerged within the committee over the next policy direction. Three Fed policymakers voted for a 25-basis-point hike at that meeting, reflecting growing concern among some officials that persistently above-target inflation may require additional tightening. Two regional Fed presidents without voting rights this year also indicated they supported a hike.

Collins, who also lacks a vote on the Federal Open Market Committee (FOMC) this year, said she supported the July decision to hold rates steady. She believes the still-restrictive policy rate, combined with a notable rise in long-term Treasury yields, helps tighten financial conditions and eases some inflation pressures stemming from strong household and business spending. Meanwhile, she expects the pass-through effects of earlier tariff increases on goods prices have largely played out, and the inflationary impact from oil price gains should gradually fade in the future. If these factors evolve as expected, the Fed may have more time to observe inflation trends without immediately raising rates further.

However, Collins also warned that a more adverse scenario is "entirely possible." She said new negative supply shocks and stronger-than-expected economic activity could both pose upside risks to inflation. Notably, Collins specifically pointed to the current massive wave of artificial intelligence infrastructure investment. She said, from the perspective of stronger-than-expected activity risk, AI infrastructure buildout appears to be exerting upward pressure on core goods inflation. As tech companies and cloud computing firms ramp up investment in AI data centers, demand for chips, servers, power equipment, and other infrastructure products is surging.

Collins' remarks indicate Fed officials are beginning to focus on whether the AI investment boom, beyond boosting economic growth, might also create new inflation pressures on certain goods prices through robust capital expenditure demand. This adds fresh complexity to the current policy environment. On one hand, recent inflation data shows some improvement; on the other hand, factors like AI investment could continue supporting economic activity and generating new price pressures.

On the labor market, Collins said the U.S. employment landscape remains in an "unusual balance," but that balance is not without risks. She did not alter her current stance in favor of holding rates steady, but stressed that future policy will still depend on whether inflation improvements can be sustained.

Another key market focus this week will be Fed Chair Kevin Warsh's speech on Friday at the Jackson Hole global central bank symposium. Investors will closely watch how Warsh assesses recent inflation cooling, rising long-term Treasury yields, and the possibility of further rate increases ahead.