Just a few years after the peak of a global pandemic that significantly disrupted supply chains and catapulted millions of Americans into unemployment, the U.S. economy has made a startlingly strong and fast recovery. Boston Federal Reserve Bank President and CEO Susan M. Collins – and former Ford School dean – returned to the Ford School on November 20 to share her insights on these trends, and the role of monetary policy in restoring stability to the U.S. economic system.
The Federal Reserve’s “dual mandate” requires it to strike a delicate balance between controlling inflation on the one hand and increasing employment on the other, using the federal funds rate as its primary policy tool. Reflecting on the Fed’s decision to raise rates in 2022, Collins argued that “restrictive monetary policy has clearly been one factor helping to rein in inflation….it has played a role in rebalancing demand with supply, reducing pressure on wages and prices.” Since then, the U.S. has seen significant increases in employment, worker productivity, and new business creation. Collins used data to illustrate these successes, demonstrating how “the labor market has normalized from unsustainably tight conditions just a year or two ago.”
“My bottom line is that I see an economy that is in a good place overall, with inflation heading back to the 2 percent target amid a healthy labor market,” Collins said, providing an optimistic view of future economic opportunities. “The primary job for monetary policy in this context is sustaining these favorable conditions over time…Past experience teaches that this is the environment which enables the benefits from a vibrant economy to be shared widely.” For instance, labor productivity has continued to rise even after the post-pandemic unemployment, due to factors such as rising efficiency among existing firms, surges in entrepreneurship, and innovations in artificial intelligence.
Despite the Fed’s recent decision to begin cutting rates, Collins emphasized the importance of exercising caution while simultaneously endeavoring to unleash further growth. The Fed analyzes data holistically in its deliberation process. Collins identified some of the most important indicators to watch at this stage as “ensuring that inflation expectations remain anchored, that we aren’t seeing evidence of new price pressures,” and determining whether “past shocks are working their way through the system.” In the long run, Collins expects normalization toward a lower, more “neutral” federal funds rate to occur. But, at least for now, “our foot’s not off the brake pedal yet.”
