May 22, 2024 - Economy

Inflation will come down gradually, though slower than expected: Fed official

Boston Fed president Susan M. Collins

Boston Fed president Susan M. Collins. Photo: Andrew Harrer/Bloomberg via Getty Images

On Tuesday afternoon, Axios spoke with Susan M. Collins, the president of the Federal Reserve Bank of Boston, on the sidelines of a conference in Florida. Here's what she had to say, lightly edited for length and clarity.

The big picture: Since Collins's last speech, new data pointed to lower April inflation. Asked about it, she said, "I don't overreact to a month."

  • "I think that I am expecting to see gradual, continued disinflation. I think it's going to take longer than I thought it was going to some months ago."
  • "I think April data was welcome because it showed some additional rebalancing, which I think is important, and I do think suggested that the first quarter was a bit more of an interruption, but it's early. I think we're well-positioned to be very patient and methodical, and that really hasn't changed."
  • "I do think it's really helpful because the dynamics in different parts of the inflation data, for example, are really different. And so I saw some good news in the non-housing services, which I think is helpful. But again, early."

We asked whether the last several months have changed her view on whether there needs to be a meaningful weakening in the economy — higher unemployment, slower GDP growth — to achieve the Fed's inflation goals.

  • "So if you went back a year plus ago, I would have expected that we would have needed more softening than I do now," Collins said. "One of the things that we saw in the second half of 2023 was significant disinflation with a much more robust labor market and economic activity then."
  • "I think that was a surprise, and I think it has really pointed attention to the importance of both supply and demand factors, and I think we've seen some really good news on the supply side. I think some of that may continue, but I don't think we can count on as much good supply side news as we've seen, which is why I think that we do need demand to moderate."
  • "I don't think we need demand to be weak. I think the growth needs to moderate more back to trend. We've seen retail sales being a bit softer. We've seen, I think, in the first quarter some slowing on the GDP growth side. I think that's consistent with rebalancing, and so that is a change in what I would've thought a year ago."

We asked about inflation in housing, and how confident Collins is that it will come down in the months ahead.

  • "If we don't have moderation in demand," she said, "then that could lead to rents moving in the wrong direction, and then my confidence level for what happens to shelter inflation is much lower."
  • Moreover, "although there's a lot of uncertainty around it and what we've seen in terms of new rents, I do think we are going to see it show through into the overall shelter inflation numbers. But I think what we've seen is how difficult it is to figure out the timing of that."

A central question lately is how much the Fed's elevated interest rate policies are restricting economic activity, in light of solid growth.

  • "I do see rates as being restrictive," Collins said. "Now, restrictive is not either on or off. There's a range of degrees of restrictiveness, and I see the current context as what I would say is moderately restrictive."
  • "I think a moderately restrictive regime, or policy stance while we're patient and methodical and look broadly, actually makes some sense to me. So, what I see is moderately restrictive."
  • "I do think that we're seeing both labor markets and economic activity coming into better balance. The accumulated savings are coming down and retail sales were quite a bit softer, so I do think that we're seeing evidence on the demand side of policy that is moderately restrictive."
  • "I think given two-sided risks and just how much uncertainty there is right now and having a dual mandate, that could be a very appropriate place to be."

We asked about an uptick in delinquencies on credit cards and auto loans.

  • "I'm certainly watching that pretty closely," Collins said. "I mean, I do think that there's evidence that some households are struggling, and I think that's real. At the same time, there are other households that have seen wealth increase significantly."
  • "Delinquencies have been increasing quite rapidly on both auto loans and credit cards. For credit cards, we're only back to where we were roughly pre-pandemic."

What would lead Collins to think that the next move should be an interest rate hike rather than the rate cut she and her colleagues think could be on the way?

  • "My baseline, I think it's unlikely," she said.
  • "Are there contexts in which if we saw inflation indicated really sustained moving in a different direction, would it be something to consider? But again, it's not something that I think is likely. I think holding for longer is appropriate in the context of the data that I'm seeing right now."
  • "I think we've made significant progress [on reducing inflation], and I never thought it was going to be a smooth, even path."
  • "There are a variety of contexts which lead me to think we really are quite well-positioned, and there are uncertainties and risks that are significant. And so having a bit of humility while we really are patient and methodical seems exactly the right policy to make."

One of the positive surprises in 2023 was a rise in labor productivity. We asked Collins for her assessment of the drivers of that and whether she thinks it is sustainable.

  • She views it as "too early to parse out the relative importance of a number of potential different factors, but I do think that it's real."
  • "Other advanced economies are not seeing it. Canada's not seeing it. The Euro area's not seeing it. The U.K. is certainly not seeing it. I see it in the data. I also hear it consistently when I talk to employers around the First District," which are the New England states served by the Boston Fed.
  • After a period in which firms had a hard time finding workers, "it was like a mindset shift in which people thought, 'How are we going to be as efficient and effective as possible with the resources that we have? And what can we do if we're not sure if we can hire? ... So that's a level change, that's not necessarily an ongoing productivity increase."
  • "AI and gen AI — do I think that'll increase productivity? I think that's down the road. I don't think we're seeing that yet. But I do think that this shift that many employers were compelled to really focus on is still underway."
  • New business formations have been climbing, she notes. "Typically, when there is a real burst in new firms, that often pushes productivity increases."

Collins, a longtime academic, is nearing her two-year mark as a Fed official. We asked about her biggest surprise about the role as a policymaker.

  • "I knew quite a bit about the Boston Fed and the Federal Reserve. I didn't really fully recognize the breadth of the portfolio and the different ways that we work to really support a vibrant economy. And I like to say our mission, our overarching mission, is a vibrant economy that works for everyone, not just for some people."
  • "The range of things that we do—through our community economic development, through the range of kinds of research we do, through our New England Public Policy Center, our working place initiative that now has 30 sites, across five states to New England, helping to ... bring together collaborative leaders in different places—I really had not fully understood that. And the extent to which most of the public really doesn't know much about what the Fed does. It's still really a surprise to have conversations with people who have no idea what we do."
  • "To be able to actually talk to different stakeholders, make it clear that we really want to understand their experiences, what they see as opportunities, what the challenges are, it complements the statistical analysis. It can sometimes lead us to analyze the data a bit differently. I do think the value of that engagement matters."
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