Boston Fed President Susan Collins Talks Inflation, Housing

Susan M. Collins · Federal Reserve Bank of Boston

Inflation is too high and broadening; she is watching expectations and persistence closely, though expectations are not unmooring.

Collins cites evidence in the CPI data of broadening price pressures, which she says she has been watching. Energy is one driver, showing up in transportation costs and food prices, but she argues the picture is broader than energy. Demand has been solid and healthy, including business investment related to AI and household consumption. She says CEOs she met in Vermont expect to pass cost pressures, from energy to health insurance to other inputs, through to consumers, beyond luxury goods. She is concerned about persistence and how quickly inflation will come back down. She watches medium- and longer-term inflation expectations as a gauge of credibility; she has not seen them unmooring, but she says they need careful monitoring.

“inflation is too high, and we're actually seeing some broadening, evidence of broadening of price pressures.”at 2:23

Susan M. Collins · Federal Reserve Bank of Boston

US economic growth is quite resilient, perhaps a little stronger than expected despite shocks and uncertainty.

Collins says economic growth has been quite resilient and perhaps a little stronger, given the uncertainty and the shocks the economy has absorbed. She pairs this with healthy growth and a labor market on firmer ground. She also notes that there are both upside and downside risks on the real side of the economy that policymakers need to keep in mind.

“Economic growth, quite resilient there and perhaps a little stronger given the uncertainty and some of the shocks we've seen.”at 3:16

Susan M. Collins · Federal Reserve Bank of Boston

Policy direction is clearly toward tightening; additional firming soon is appropriate, with a tighter path than penciled in.

Collins argues that because inflation is too high and has been for too long, and because she sees evidence of broadening price pressures, the direction of monetary policy is clear and needs to be tighter. She ties this to a labor market on a more solid footing and resilient growth. She says a bit tighter path than she had penciled in a couple of months ago may be appropriate. She stresses that the size and timing, including whether to move 50 basis points, will be decided meeting by meeting, and that scenarios exist in which she might view it differently.

“that monetary policy needs to go, and I would think that soon some additional firming tightening of policy is appropriate.”at 3:34

Susan M. Collins · Federal Reserve Bank of Boston

Demand is solid and aggregate consumption healthy, though some households are struggling to make ends meet.

Collins sees demand as having been quite solid and healthy, with business investment, including AI-related investment, and consumption both contributing. Although some households are having trouble making ends meet, she says aggregate consumption has continued to be healthy. She argues this strength of demand relative to supply means price pressures need to be watched so they do not broaden further.

“I see demand as having been quite solid, quite healthy. Some of that's business investment, AI related and broader, but some of it is also consumption. Although some households are having trouble making ends meet, the aggregate consumption has continued to be healthy”at 8:14

Susan M. Collins · Federal Reserve Bank of Boston

Labor market is on a more solid footing; some firms plan to hire while smaller firms hold hiring plans back.

Collins describes the labor market as probably on a more solid footing. In New England, she hears from some firms with strong demand that plan to hire more people in key sectors and are worried about finding workers with certain skills. Other firms, especially smaller ones, have hiring plans much more on hold. Unemployment is very low in some pockets, around 2.5% in parts of Vermont, which she attributes partly to supply and partly to demand strength in certain areas. She notes that housing often comes up as a barrier to attracting workers across the income spectrum.

“I certainly hear some firms that see strong demand and they are expecting to be hiring more people in key sectors and actually worried about the ability to find people with certain kinds of skills.”at 10:29

Susan M. Collins · Federal Reserve Bank of Boston

Housing supply is constrained by weak construction productivity and zoning; interest rates are only part of the problem.

Collins says construction productivity has actually declined, even though overall US productivity has been rising, and that this needs better understanding. She acknowledges that higher interest rates both slow supply creation and reduce the ability to buy. She argues that bringing inflation down and keeping it low and stable is what will create a good long-term environment for housing. She adds that housing challenges have many causes, including zoning, which the Fed has little control over, so there are no silver bullets.

“For example, construction productivity, which has actually declined even though overall productivity has been increasing in this country.”at 12:09

Susan M. Collins · Federal Reserve Bank of Boston

Firms increasingly report AI letting them meet more demand and expand, more than replacing workers.

Collins says there is a lot of anxiety about AI's labor impact, but the firms she talks to more frequently report that AI gives them opportunities to meet more demand and likely expand. She says she hears about this more often than about AI substituting for labor. In her view, AI is more often a complement that may enable firms to grow, which changes the kinds of workers they will need going forward. She acknowledges that a variety of effects are likely.

“I am much more frequently hearing that firms are seeing AI providing opportunities for them to meet more demand and likely to expand”at 14:34

Susan M. Collins · Federal Reserve Bank of Boston

AI-related borrowing and financing is influencing medium- and longer-term interest rates; the Fed and her team are watching it closely.

Collins says AI-related borrowing and financing approaches are among the factors influencing medium- and longer-term interest rates, not just short-end moves that the Fed controls. She and her team are looking at the resilience of financial institutions and the connections across them. She says financial markets are currently stable and functioning well, but different scenarios need to be watched.

“[That is the] AI and borrowing to financing approaches are one of the things that are influencing medium and longer term interest rates.”at 15:54