Boston Fed President Collins remarked that she has been surprised by how strong the economy is after interest rate increases to date. She said that, as a result, the Fed may need to do more to get inflation on a path back to 2% in a reasonable amount of time.

This said, Collins also noted that it is best to move gradually to be able to have a larger set of data for decision making. She said she has not yet made a decision about her vote in the September meeting.

This creates a challenging puzzle for issuers and investors. On one hand, the view is that the economy is resilient and it does not look like we are on a path back to 2% inflation yet – so rates may need to increase. But on the other hand, Fed officials are cautious and are waiting for more data.

One possible outcome is that inflation continues to run hot, the Fed waits longer to increase rates, and so rates stay higher for longer – pushing up 5-year and 10-year treasury yields. This is an outcome from which DCM participants may want to consider protecting themselves.