In an exclusive interview with Yahoo Finance, Federal Reserve Bank of Boston President and CEO Susan M. Collins says she "could imagine scenarios" that would be consistent with both one or two rate cuts this year.
Overall, Collins says there is "evidence the economy is coming into better balance," and she is "optimistic" the Fed will be able to bring down inflation and maintain a healthy labor market.
"It's gonna take some time" for inflation to reach the Fed's 2% target, Collins tells Yahoo Finance's Jennifer Schonberger, but "things are very volatile. You get some welcome news and then there's challenging news. So I think it's really important not to overreact to what has been encouraging." Collins points to recent reads on CPI and PPI, arguing they are "consistent with an economy that, in an orderly way, is becoming better aligned," but she cautions that monthly data has been "really volatile" and patience will be necessary.
Collins emphasizes the importance of looking at a "wide range of data" when trying to figure out if inflation is truly on a downward path. She points to shelter inflation and some services inflation are going to be stickier than other components.
Collins says there "are very plausible scenarios" that would result in the Fed lowering rates later this year. She also notes that there are risks to the Fed not lowering rates soon enough, saying it's something she is "carefully" watching for signs of.
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This post was written by Stephanie Mikulich.
Video Transcript
Jennifer Schonberger: I'm here in Lawrence, Massachusetts, which is about 45 minutes north of Boston, where I have spent the day shadowing Boston Fed President Susan Collins as she gathers information firsthand on the ground about the economy, talking to local businesses, banks, community developers, all information that she will use in her decision making when it comes to setting interest rates. Susan, thank you so much for letting me tag along with you today and for sitting down with me. It's been great to be with you and Lawrence.
Boston Fed President Susan Collins: Absolutely a pleasure. I'm glad you could join us.
Schonberger: What did you take away from your conversations today on the ground and how is that informing your outlook for the economy?
Collins: Yeah, and it's wonderful to be able to meet with so many different stakeholders from around our community. This is something that I think is really essential to understanding what's actually happening on the ground. Um, you know, it compliments the data that we look at and the analysis and modeling that we did. And one of my key takeaways was really understanding some of the challenges that the, um, higher inflation that we had endured, um, is creating, especially for smaller businesses. And, uh, the fact that labor markets are actually, uh, coming, uh, improving. Um, it's getting easier for people to hire and there's much less turnover. And so hearing, uh, from people who are on the ground firsthand, smaller businesses and larger businesses and community leaders has just been extremely informative.
Schonberger: I do wanna follow up on inflation and what you learned today, but first on the economy. Given what you heard today in the comments from local businesses, how is that lining up with some of the cooler data that we got in terms of first quarter GDP on account of slower consumer spending? We got a retail sales number this morning, was a bit more tepid, signs of some cooling in the job market. How are those two lining up?
Collins: So I think what we're seeing, I think they actually line up quite well. What I see in the, um, statistical data is certainly evidence that the economy is coming into better balance. There's been some slowing in demand, but an economy that's still solid, but it's still quite mixed. There are differences across sectors, there are differences across regions. And what I heard today, it's very consistent with that in the sense of, um, some firms that are still seeing quite strong demand and others where they're, uh, seeing, uh, consumers being, um, you know, a bit more cautious in terms of their spending. And, and so to me that aligns quite well.
Schonberger: So the soft landing still in place?
Collins: Well, I continue to be that realistic optimist, optimistic that we're gonna bring that inflation down, but we're gonna do it amid a labor market that stays quite healthy and um, you know, lots of uncertainty around that. But I still see that possibility as being, uh, very much the path that I believe and hope we're on.
Schonberger: On inflation. You said previously that you think it's gonna take longer than thought for inflation to come back sustainably to 2%. Given the information that you gleaned today on the ground in conjunction with some of the more official data that we've gotten at the start of the second quarter, uh, namely that cooler than expected reading on May CPI expectations for a softer PCE, are you still maintaining that view or do you think we will see inflation come down faster as we go through the summer months?
Collins: I think that it's gonna take some time. I think what we've seen in the data, and again consistent with what I heard on the ground, uh, today, is things are very volatile. Um, you know, you get some welcome news and then they're challenging news. And so I think it's really important not to overreact to what has been encouraging. I think the data that we have seen recently in terms of CPI in terms of the producer prices, um, is consistent with an economy that in an orderly way is becoming better aligned. Um, but we also first quarter saw, uh, news that was more disappointing and the inflation numbers in particular, but other data as well. Those monthly numbers are really volatile. The volatility is still quite elevated. And so I do think we have to be patient because, um, one of the things I heard firsthand is how important it is for us to return to a sustainably low and stable inflation. Um, it matters for people and we wanna make sure that we, uh, really stay the course.
Schonberger: So from this point forward, you think it's gonna be more volatile, perhaps the May CPI number that we saw was a bit of an anomaly, do you think we will see progressive cooling from here and you know, we saw three quarters of inflation data that was higher than expected, zapping your confidence, would three months of lower inflation data restore that confidence?
Collins: So I think it has been volatile. I, I don't know that I expect it to become more volatile, but I think what we've seen is continued volatility, um, relative to before the pandemic. And I think we're gonna have to let the data really tell us when it's clear that we're sustainably on a path. And that means looking at a wide range of data. I like to talk about a constellation. There are lots of different, uh, pieces of information that I think it's important to come together and, you know, I do think, but
Schonberger: With three months of lower inflation data, restore your confidence
Collins: That I, that would help. And I would say, um, you know, looking after the, uh, very positive disinflation with strong activity at the, in the second half of 2023, um, I still needed more confidence at that stage. And so I do think that it'll be important to see more information that is consistent. We don't have to get all the way back down, but I do think that, for example, um, some components are likely to take more time. I think shelter inflation is likely to take more time. I think services, other services, we've seen some good news, but, um, I think there's some parts to that that we're just gonna have to be patient.
Schonberger: So given what you just said, does it, is September too premature to think about cutting rates? Are we looking at something later in the year, more like November, December?
Collins: I think we're gonna have to let the data tell us. So it seems to me that there are very plausible scenarios, um, where we, um, you know, later in the year it would be appropriate if we see strong continued good news on inflation and an economy that is aligning, um
Schonberger: That sounds like November, December
Collins: Well, uh, you know, I think that we need to see, so again, I am, I'm not going to, I think we have learned that, um, there's no crystal ball, that there's no preset path. We have to let the data tell us. And it's not one or two indicators. It's looking more holistically at the information.
Schonberger: Are you looking at one or two rate cuts at this point, given where things are.
Collins: I could imagine scenarios that would be consistent with both. I mean, I, I think that as I look forward, um, my view of how much easing might be appropriate this year has, uh, been reduced as I looked at the data. And that's consistent with the summary of economic projections that, um, all of the participants, um, put forward last, uh, last week. And so I think one way to think about that is that there are different scenarios that might be plausible in terms of what might be be appropriate.
Schonberger: So you're basically one it sounds like?
Collins: Well, I think we'll have to let the data tell us,
Schonberger: Before I let you go, what's the risk that in the quest to gain confidence that inflation is dropping sustainably back to 2%, that you hold rates at current levels so long that you sow the seeds of a recession?
Collins: So the risks are absolutely two-sided and both sides of our mandate are top of mind for me. So I do think that there is a risk that if we held too long, we would see more slow down than we need. And that's something that I watch carefully. You know, I I think that labor markets are still strong. I think they are not overheated the way that I would've described them earlier. But continuing to watch what's happened across a range of indicators in that space is also important in terms of the timing that will be appropriate to change the stance. So it's balancing the risks of prematurely easing. And it would be, you know, if if we prematurely ease, we're just gonna make it that much harder to do the work we need to do. But to your point, we certainly don't wanna wait too long. And so it's a risk calculation.