Susan M. Collins: A View from the Fed

0:00:00.9 Celeste Watkins-Hayes: Welcome everyone to the Gerald R. Ford School of Public Policy and a very special welcome back and welcome home to our distinguished guest, Susan Collins.

[applause]

0:00:17.8 CW: I am Celeste Watkins-Hayes, the Joan and Sanford Weill Dean of the Ford School. And let me just say, I think that being the Dean of the Ford School is one of the best jobs someone can have. I love the scholarship, the students, the teaching, and of course my colleagues, and my predecessors have gone on to other jobs, provosts, chancellors, and even members of the Federal Reserve leadership. And I am so happy for them. But I know deep down they miss being Dean of the Ford School. Susan, it's an honor to have you here. It's an honor to be in your distinguished company as someone who has led this institution. You are a role model and a mentor to me, and it's wonderful to welcome you back.

0:01:06.6 CW: Let me share a little bit more about Susan Collins. She was the fourth school dean between 2007 and 2017, she welcomed our first class of undergraduates and led that new degree program to success. Undergrads in the room, please wave. Thank you. Welcome and happy to have you here. She grew this Ford School's visibility with a number of key strategic initiatives, including the launch of this very event series, Policy Talks @ the Ford School. She created new global engagement opportunities for students, raised many millions of dollars for the school, led our first strategic plan for diversity, equity, and inclusion, and led our back-to-back centennial celebrations for President Ford and the school. Susan was also tapped to serve as the university's provost and Executive Vice President for Academic Affairs from 2020 to 2022. She launched a holistic initiative to address student mental health and wellness, worked to eliminate sexual and gender-based misconduct, and initiated a multifaceted anti-racism initiative aimed at expanding the university's scholarly work in this area.

0:02:20.3 CW: In 2022, she was selected to be president and chief executive officer at the Boston Fed, one of the 12 regional reserve banks in the Federal Reserve system. In that role, she also participates in national monetary policymaking on the Federal Open Market Committee. Susan, it's an honor to welcome you back to the Ford School and to Michigan, and we also wanna welcome John Leahy, who will be today's conversationalist with Susan Collins. John is the Allen Sinai professor of economics and chair of the economics department here at the university. So thank you John for leading in this conversation. A quick note about today's format. Susan will speak for about 30 minutes and then be in conversation with John. For the last half hour we'll open the discussion up for audience questions. For questions in the room, please use the QR code on the orange cards around the room. And if you're watching online, the question link can be accessed on the event page or in the event description on YouTube, LinkedIn, or Facebook. So now the floor is yours, Susan. Welcome.

[applause]

0:03:40.6 Susan Collins: It is such, just truly a pleasure to be back here at the Ford School, and it does really feel like a homecoming. So Dean Watkins-Hayes Celeste, thank you for such a wonderful, warm welcome and thank you to all of the students and the faculty and the staff that I've had a chance to talk with already during my visit so far. I have to say, the Ford School really is a very special place. And so spending time with faculty and staff, and especially students who are undergraduates, master's students, PhD students has just been an absolute delight. I've really also enjoyed learning about some of the new programs and the new things that are underway here. And I am just going to commend the school for the exciting work that is happening here. It's great to see it continue to thrive.

0:04:39.8 SC: So shifting to my remarks, today I would like to share my perspectives on the economy and on monetary policy, focusing primarily on where we are more so than how we got here. And then offering my thoughts, looking ahead. I know that the Federal Reserve is a bit of a mystery to many people. And so I wanna take the opportunity at the end of my remarks to talk briefly about the Fed itself. And there I'll focus on the Boston Fed, and I'll give some examples of the breadth of the work that we do in support of our mission and our mandate from Congress. And then I look forward to the conversation with John, also a good friend and dear colleague and questions from the audience as well.

0:05:29.8 SC: So just to get started, I'll begin with my perspective on the national economy, but as always, first a standard disclosure. The views that I'll express are my own and may not represent those of my policymaker colleagues at the Board of Governors or the other reserve banks. I like to provide a little bit of context before I dive into a topic and use a few charts along the way. And I also like to give my bottom line up front, and so that's how I'm gonna start things off. Congress has given the Fed a mandate, and that's a mandate to preserve price stability, low and stable inflation, and also maximum employment. And the FOMC or Federal Open Market Committee, which is the Fed's monetary policy making body, defines price stability as inflation at 2%. I actually like to think of it as inflation that's low and stable and so nobody's thinking about it. They're focused on economic activity.

0:06:33.8 SC: Maximum employment is a little less specifically defined. I like to think of that as a broad inclusive goal of job opportunities for all Americans in a context of price stability. So let me start with a bit of history. Figure 1 focuses on the two parts of that dual mandate. The left hand panel shows the Fed's preferred measure of inflation, and it's calculated using the PCE or personal consumption expenditure price index. And the blue line in that chart is total inflation or headline inflation measured over 12 months. That's what we are actually targeting to be 2%. The green line is the 2% target, and the red line is core inflation, which excludes the volatile, but obviously very important categories of food and energy. And we exclude those often because it gives an indicator that is more helpful in terms of forecasting what inflation will be in the future.

0:07:38.0 SC: So the right hand panel shows the evolution of unemployment, and that's a good indicator of the overall labor market conditions. But of course, I and my team follow a very wide range of indicators to gauge the state of the labor market. So if I think back to July of 2022, when I began my role as president of the Boston Fed, the US economy was coming out of the worst of the pandemic. Unemployment was certainly weighed down from the spike that happened during the COVID-19 shutdown. But in fact, the chart shows that unemployment fell very rapidly from that peak instead of what we see more typically after a recession, which is a more gradual decline. And the recessions are shown in these charts by the gray bars. So this is just one of the ways that the recent cycle has been very unusual.

0:08:35.7 SC: And at the time, firms were struggling to find workers, which was one of the factors fueling upward pressure on wages and prices. Supply bottlenecks were still extensive, and that was exacerbated by Russia's War in Ukraine. Demand then outstripping supply had caused a surge in inflation and higher prices were already very challenging for households, especially low and moderate income households, and also for firms at that time. So getting inflation back under control was the clear policy priority for the Fed and the FOMC responded by raising the federal funds rate, which is the Fed's main policy tool, raising it rapidly to the range of 5.25% to 5.5% by July 2023. And this shift from a very accommodative policy stance to a quite restrictive stance helped to realign demand and supply. And I had mentioned that the misalignment, that gap was part of what was fueling and causing the inflation.

0:09:39.6 SC: And so that helped to relieve the price pressures and thus reduce inflation. So where are we today? Well, as Figure 1 shows, inflation has come down significantly, though core inflation is still somewhat elevated and the unemployment rate is higher than it was a year ago, but it's low by historical standards. And as I've discussed shortly, growth remains robust, economic growth. My bottom line is that I see an economy that's in a good place overall with inflation heading back to the 2% target and doing so amid a labor market that's healthy overall. The primary job for monetary policy in this context is sustaining those favorable conditions over time and focusing on both sides of our dual mandate. Past experience has shown that this is the environment that enables the benefits from a vibrant economy to be shared widely, and given a significant progress towards our goals, in my view it was appropriate for the FOMC to begin recalibrating policy, easing rates in September, and then again when the FOMC met earlier this month. So before I say more about my outlook, the balance of risks and the implications for policy, I wanna go into a bit of additional detail on economics and I'm gonna... On economic conditions rather, and I'll start with inflation.

0:11:07.2 SC: So in Figure 2, the left hand chart shows the core inflation that I mentioned as part of Figure 1 at two horizons. It's both the 12 month horizon that I've shown before, but also at a three month horizon, which is shown with the red line. And one reason to do that is the three month you can see it's a lot more volatile. It's a lot more kind of, we call it noisy, but it also gives more recent information. And so it's somewhat more timely, but then it has more noise in there. So the progress on inflation since 2022 is really apparent with the most recent values for the three month gauge close to 2%. And the figure also makes it clear that the progress has been uneven. The favorable readings in the second half of 2023 were followed by an increase in inflation earlier this year.

0:12:02.3 SC: And as the right hand panel shows, monthly inflation volatility remains elevated relative to pre-pandemic levels. And this volatility highlights the need to assess the data holistically, trying to separate what the signal is, the information from that noise, that volatility. And not to overreact to any one monthly reading. So overall, I see the inflation picture as encouraging, but we shouldn't be surprised if measured progress on a 12 month basis slows a bit in the near term as the low readings at the end of last year drop out of the 12 month computation window. And this will likely continue until we're past the higher numbers from earlier this year. So again, reasons not to overreact to one month reading. Separating core inflation into three components as shown in Figure 3 illustrates that most of the remaining elevation comes from housing. Core goods inflation in the left hand panel has been back to, in its pre-pandemic core goods inflation, which is in the left hand panel, has been back in its pre-pandemic range for many months.

0:13:18.2 SC: And the three month annualized measure of services inflation, if you take housing out, that's shown in the right hand panel, that's also returned to its pre pandemic range. And if that continues, the 12 month measure will also decline over time. However, the housing price inflation has come down some, but that progress has been slow and it's been uneven and there's clearly more to go. But here the good news, and that's shown here in Figure 4, is that the data show little evidence of new price pressures from market rents, which is an important driver of shelter inflation. All three of these different measures of rents associated with new leases are back down from their 2021-'22 surge. So shelter inflation is high because rents for existing tenants are still catching up to this past surge. And while this catch up process may continue to be slow and to be uneven, it does not raise concerns for me about the durability of inflation's trajectory back to 2% as long as the new tenant rent inflation remains subdued and overall inflation expectations stay well anchored.

0:14:34.2 SC: So Figure 5 highlights the situation related to inflation expectations and shows that that is favorable as well. Short term expectations are near their pre-pandemic range, and that's shown on the left hand panel. And more importantly, long run expectations, which are in the right panel have stayed well anchored throughout the inflationary episode. And this makes returning to 2% inflation feasible without the economy staying below capacity for some time, which would have been the case if expectations had risen and needed to be re-anchored. The stability of long run expectations during this period further speaks to the credibility of the Fed in fighting inflation. And what about labor markets? The three panels in Figure 6 show just a few of the many indicators that I follow. The unemployment rate remaining near 4%, low unemployment claims, and declines in both job openings and quit rates.

0:15:38.3 SC: These indicators are also near levels that were seen around 2018 when labor market conditions were arguably consistent with full employment. In other words, the labor market has normalized from unsustainably tight conditions a year or two ago and is consistent with inflation durably returning to the 2% target. This healthy picture of the labor market is also reflected in conversations that I have had with employers from across the Boston Fed District, which encompasses most of New England. However, I do wanna note that payroll job growth has slowed over the past year, and that job creation has become more concentrated in just a few sectors. That's not shown on the chart, but it is one of the things that I'm watching.

0:16:21.9 SC: The combination of disinflation with the labor market that's near employment is taking place amid a robust output growth. And that's shown in Figure 7. The blue line depicts the evolution of real GDP, which has been growing considerably faster than estimates of trend output from 2015 to 2019. And that's the dash blue line. And as suggested by the dashed red line in the current context, this implies a notably higher trend growth rate since the pandemic. Strong growth with no meaningful signs of new price pressures highlights the important role that favorable supply developments have played so far in the recovery. One of these developments has been an expansion of labor supply, which came in part from a larger than expected increase in labor force participation.

0:17:13.4 SC: Interestingly, Figure 8 shows that this rise in labor force participation, and this shows the prime age, that rise has occurred across gender, which is shown on the left and also across racial and ethnic groups, which is shown on the right. And although not shown, increased immigration was also a major contributor to this expansion in labor supply. And there's work both underway and still to be done to better understand these developments and their implications and the extent to which they're likely to persist. Another positive supply development has been a notable rise in labor productivity, and Figure 9 shows one such measure, which is real output per hour for the non-financial corporate sector. The initial surge in labor productivity reflected the sharp drop in employment early in the pandemic, which was followed by severe labor shortages that were partially reversed when firms were able to replenish their workforces. Still even after the catch up in employment, productivity remains on a higher trend than it was before the pandemic. And notably other advanced economies have not experienced the same favorable productivity developments.

0:18:26.0 SC: A number of reasons have been cited to potentially explain the strength of US labor productivity. First, some firms learn to do more with fewer workers by investing in labor saving technologies and restructuring aspects of their production. And figure 10 highlights some sectors where it seems that this likely occurred. For professional and business services, which is shown on the left, the productivity gains don't seem to be slowing much, but it's possible that some of the improvements in some sectors were level improvements and that boost to growth is now behind us so that productivity may revert to previous trends, and that could be the case in sectors such as healthcare and leisure and hospitality, which are shown on the right. However, other developments could prove more persistent, in particular, there's been a surge in new business formations since 2020, and that's shown here in Figure 11.

0:19:24.8 SC: This is a very promising development that's in stark contrast to what's been described as the broad base slowdown in US business dynamism from 1970 to 2020. Indeed, the entry and dynamics of new firms has been shown to be a significant driver of job creation, innovation and productivity growth. And finally, it's possible that AI could be behind some of these productivity improvements. However, in my view, the overall impact of AI at this point is still likely to be small, but it could increase meaningfully going forward. Importantly, given the labor productivity improvements to date, I don't see much scope for wages to disrupt the ongoing disinflation progress. Indeed, analysis by my staff at the Boston Fed shows that labor remains relatively inexpensive on average given recent productivity gains in price developments. And therefore, even though wages are growing faster than they were pre pandemic, this is not placing additional pressures on inflation. And while many workers still grappling with the effects of high prices, preserving the current favorable conditions also means maintaining an environment where they can continue to see increases in the purchasing power of their wages and improvements therefore in their economic wellbeing. And this is one of the key reasons in my view why restoring and sustaining price stability is so important.

0:20:56.5 SC: So against this backdrop, it was appropriate to begin recalibrating monetary policy this fall. And I expect that additional adjustments will likely be appropriate over time to move the policy rate gradually from its current restrictive stance back to a more neutral rate. But policy is not on a preset path, and the FOMC will need to make decisions meeting by meeting based on the data that are available at the time and their implications for the economic outlook and for the evolving balance of risks. And I'll close my section, this section of my remarks by saying a bit more about my thinking here. So this figure, Figure 12 shows the path of the federal funds rate and with the left side giving historical context. The panel on the right focuses on the recent period in which the FOMC increased the rate rapidly from essentially 0% in 2022 to 5.5% in July 2023. And then held the rate at that level for 16 months before cutting by 50 basis points in September and another 25 earlier this month.

0:22:06.7 SC: Restrictive monetary policy has clearly been one factor helping to reign in inflation. Combined with the supply improvements I've already mentioned, it's played a role in rebalancing demand with supply, reducing pressure on wages and prices, but as I've also already discussed, the overall effects from restrictive policy on the labor market and the real economic activity have been modest so far. One reason for this has to do with factors that were unique to the pandemic recovery that strengthened the financial positions of both households and firms. And the left hand panel of Figure 13 shows that pandemic era household support programs combined with limited spending opportunities when much of the economy was shut down led to the accumulation of significant amounts of extra savings, and that's shown by the red line. In addition, many firms were able to lock in longer term debt at very favorable rates, and as shown in the right hand panel, corporate cash holdings increased notably, and these developments likely provided some cushion from the full effects of higher interest rates.

0:23:15.1 SC: But Figure 13 also makes clear that these special buffers have waned. Most of the excess household savings are now depleted, and those still elevated corporate cash holdings have fallen notably. Given these developments, monetary policy needs to adjust in order to achieve our dual mandate goals. And while the final destination is uncertain, I believe some additional policy easing is needed as policy currently remains at least somewhat restrictive, and the intent is not to ease too quickly or too much hindering the disinflation progress to date. At the same time, easing too slowly or too little could unnecessarily weaken the labor market. Importantly, there are risks to achieving both our inflation and our employment goals. On the inflation side, demand has been surprisingly resilient and we could see more consumption growth than anticipated, putting upward pressure on prices. Indeed, household net worth remains elevated, equity prices have also generally moved higher recently, so households may be in addition more inclined to access the equity in their homes as interest rates decline.

0:24:24.3 SC: But on the other hand, as I've mentioned, job growth is moderating with recent gains concentrated in just a few sectors, and at this stage, any further slowing in hiring would be undesirable. In addition, an economy that's growing near trend may be more vulnerable to adverse shocks and geopolitical risks remain elevated. So all told, I see the risks to my outlook, my baseline outlook, which is quite favorable, as being roughly in balance. Inflation is returning sustainably of unevenly to 2%. And to date, labor market conditions are healthy overall. Policies well positioned to deal with two-sided risks and achieve our dual mandated goals in a reasonable amount of time. The policy adjustments made so far enable the FOMC to be careful and deliberate going forward, taking the time to holistically assess implications of the available data for the outlook and also for the balance risks that are associated with that.

0:25:24.2 SC: So as I noted at the outside, I'd like to round out my discussion of the economy and monetary policy with some perspectives about the Fed itself, and I'm gonna focus on the Boston Reserve Bank. Now, I know that the Federal Reserve and central banking more generally can seem a bit mysterious, in fact my colleagues and I are actually quite eager for the American public to know about and have confidence in the work that we do. And so I wanna say just a bit about our structure, the grounding, our roles and the breadth of the work in our portfolio. The Federal Reserve's design is unique, emphasizing the breadth of stakeholders and regions in our economy and the range of perspectives that are needed to support it. And as you see in Figure 14, our federated structure has 12 reserve banks representing every part of the country, as well as the board of governors in Washington DC, and our senior policy makers are appointed to their roles in different ways.

0:26:21.2 SC: All of this makes the Fed representative of the country, appropriately accountable and also independent enough to make hard choices in the longer term public interest. Congress created the Federal Reserve and gave us the mandates to guide our monetary policy responsibilities, as I noted earlier. And one of the things that my colleagues and I find inspiring about our congressional mandates and more broadly our role in serving the public, is the fact that our mission and our mandates are for the public, and that means all of the American public, and at the Boston Fed our vision is a vibrant economy that works for all. And I like to add it works for everybody, not just for some people. And to do all of this, we have a variety of roles and responsibilities. I discussed monetary policy where our contributions are rooted in extensive and very rigorous research and analysis.

0:27:13.5 SC: Our researchers also do important work on a range of aspects of the economy. I've mentioned our analysis concluding that given recent productivity improvements, there's room for further wage gains without inflationary pressures. A second example is our research on aspects of the housing challenges that are so prevalent in New England and across the country. A third is reflected in the topic of our 68th economic conference, which we held just last week. And the focus there was the future of finance, looking at implications of technological innovation for small businesses, for financial inclusion, for financial stability and more, and considering both the promise and the challenges associated with that innovation. In addition to rigorous work with quantitative data, we also put a strong emphasis on understanding how different people and places experience the economy. Pursuing the mandate for price stability requires us to understand inflation's impact on people in all areas and across the income spectrum.

0:28:17.1 SC: Pursuing the mandate for maximum employment requires us to understand not just national aggregates, such as aggregate unemployment and national job openings, but also the different outcomes for various people and places. And while I always immerse myself in economic data, I also compliment this with conversations across the economy stakeholders and just some examples of some of those interactions are shown on this final slide. It's extremely valuable to hear how people are experiencing the economy and so I meet with business owners, small and large, entrepreneurs and innovators, workers, advocates, bankers, educators, and a host of others, in rural New England, in suburbs, downtown cities, former mill towns, areas where former engines of the local economy have declined or gone away, as well as areas that are thriving. The Fed has other roles in its portfolio reflecting the importance banks and the financial system have for the economy's health and for the public good.

0:29:19.2 SC: We supervise some of the region's financial institutions for safety and soundness. And in addition, our team researches and analyzes financial stability pressures and extends credit to depository institutions to promote the smooth functioning of the payment system and help relieve liquidity strains in the banking system. The Fed also supports the infrastructure for the payments transactions that we all make and receive, and that firms and financial institutions rely on to be secure, reliable, and resilient. The Federal Reserve actually developed and operated payment systems for the automatic clearing house, the ACH, so think direct deposit of a paycheck, wire transfers, cash distributions through banks, cheque processing, all of that is supported by the Federal Reserve. And now real time payments with a new service called the FedNow Service. The number and value of transactions that are handled day by day through these payment systems is huge.

0:30:21.3 SC: The Boston Fed has a history of innovation at the intersection of payments, technology and finance. Most recently, a leading role in developing FedNow, and it's the first real time payment system, it was launched in 2023, in nearly 50 years. And it brings the immediacy that we all expect in so much of our lives to payments as well. Individuals and businesses whose financial institutions adopt the service can send and receive payments any time with funds available immediately. And finally, I'll mention the Fed's support for community economic development. We conduct research to help illuminate challenges and opportunities and help as a convener and a catalyst for collaboration across sectors. We found that local people and institutions collaborating on shared challenges holds the best potential for progress in addressing those challenges and in fostering local economic resurgence. And one of the things we're proud of is illuminating in a rigorous and nonpartisan way the issues that have a profound effect on people's experiences of the economy and their ability to participate in it.

0:31:38.2 SC: An example is dependent care, which is absolutely an economic issue given that its availability and cost directly impact the ability of many people to participate in the labor market. And so that's just a taste of the wide range of things that are part of our portfolio as we pursue a vibrant economy that works for everybody. So to conclude, it just means a great deal to me to be here back at the Ford School, it really is a very special place and I've appreciated the opportunity to share my analysis of the economy and my outlook and some information as well about how the Federal Reserve fits into the American policy making framework. As I reflect on my time here at the Ford School, and also more recently at the Fed and on ambitions of these two institutions, I wanna end by saying that the Central Bank shares your articulated dedication to the public good, your grounding in service and your commitment to evidence-based policy making. So thank you, and my very best wishes to each of you, particularly the students in the audience, to the Ford School, to the University of Michigan, and of course, go blue. Thank you.

[applause]

0:33:14.8 John Leahy: Have to rehydrate after...

0:33:16.2 SC: Rehydrate.

0:33:16.5 JL: Yes.

0:33:16.8 SC: Absolutely.

0:33:18.2 JL: So I'm John Leahy, chair of the economics department, also a professor at the Ford School, and welcome home.

0:33:28.2 SC: Thank you. Great to be here.

0:33:30.4 JL: So I thought I'd begin by asking you, you've had this long career in academics, I actually know that because my first job, you had the office right around the corner, and I used to go to you for advice on everything. So you've had this long career in academics, including at the Ford School, and now you're president at the Federal Reserve Bank of Boston. What in your experience and in your Ford School experience has informed you, helped you make this transition, has been useful to you?

0:34:06.6 SC: There are actually a number of things that have come together. And maybe the way that I would frame it is by highlighting three of the key dimensions of my academic career that all are part of my portfolio in my current role. One of them is as a researcher, and so using data and analysis to better understand economic issues, in particular macroeconomic performance, and that's something that spent a lot of time on in various ways, both researching, also teaching, the teaching part of it. I also moved more and more into policy in my academic career, you know, when I was in Washington I was at Brookings as well as Georgetown, and coming here to a policy school was very much focused in using the research and analysis to make a difference.

0:35:01.4 SC: And then the third one is as I moved into doing more academic administration, I really think there are important things you can do by leading a complex organization that has a public mission. So when I think about those three things, they are really all part of my role now. And so I think what I learned throughout my career as an academic really comes together and informs the work that I do now with the, you know, the institution obviously is somewhat different, but we do a lot of research, very policy focused. There's quite a bit of teaching to help explain the work that we're doing, I think that's important. And it is also a complex public service mission organization.

0:35:48.2 JL: So now that you get to see how policy is actually made, sit on the FOMC, and what has surprised you the most, what didn't you expect?

0:36:00.6 SC: So, and it's true, you, well, someone who had the interest that I had spent a lot of time thinking about monetary policy, and in fact I had classes that would simulate being at the FOMC table and making policy decisions. It is different to sit in the room around that large table with, as part of 19 policy makers. And so I think the importance of the role and I think that really is palpable and it doesn't surprise me that the conversation, so we come, we meet, get together eight times a year in Washington DC for our FOMC meetings, that the conversation is substantive, robust, there are a range of views, we listen intently to each other, but just what that actually feels like, even though I had tried to picture it, and I think a bit of humility, so it's an honor and a privilege and also responsibility and that all comes together sitting at the FOMC table.

0:37:06.0 JL: What does it feel like?

[laughter]

0:37:11.8 SC: I think the first time looking around the room, you are trying to do your best. I would say, I think what we tell... That being focused on our goals really matter. So it feels like it is an important thing as it is. Yeah.

0:37:38.5 JL: So you've said that this has been an equitable recovery so far in other remarks. What do you mean by this, and do you think it's still true?

0:37:47.6 SC: Yeah, I didn't talk about that a lot in these remarks. I have said that, and I mean a couple of things. And I think in some ways it has been quite equitable, in other ways not so much. There's a lot to really continue to focus on and to understand. One thing is, if you look at what happened with jobs, so the pattern of employment, a typical recession what happens is unemployment rises and it takes a long time for the jobs to come back. It's quite gradual. The pandemic recession was really different. So jobs, with the shutdown, the unemployment rate, and you saw that in some of the charts, but it, and that wasn't particularly equitable, there was a bigger decline in jobs, the employment to population ratio for Blacks, for Latinos, so people of color. But if you look at the recovery, first of all, it's very rapid, and that distinguishes this recovery from previous ones. But the jobs actually came back faster for people of color, that was unusual. And so that's one of the things, the pattern of the job creation in the recovery was one of the things that I focused on. The second one is if you look at the pattern of what happened with wages, so inflation spiked, and I showed you some of those charts. And so in 2021, wages started growing very rapidly, and wages for the lower wage part of the distribution grew much more quickly than those in the middle.

0:39:30.4 SC: And those in the middle grew more quickly than the highest wages. And that was true in 2021, 2022, 2023. It's somewhat less true in 2024, but that pattern of the wage growth was more equitable than it has been. It's also true, and I hear this from many that I talk to in my meetings with people around the district, that many low and moderate income families, communities are struggling. The high price levels make it difficult to meet and to have, make ends meet. And so in that sense, there are certainly parts of our society which have seen big increases in the value of their homes and in the value of their stock portfolios. And so the gains have not been broadly shared, which is part of why, as I said, preserving the healthy conditions, that's the environment in which what we've seen in the past is that vibrancy gets distributed out more generally. And so I think there's a lot more to study there to understand. But certainly as we came out of the recovery in key dimensions, it was more equitable than recovery from past recessions have been.

0:40:49.1 JL: Moving to monetary policy, the typical story we teach to undergraduates in 101, 102, 402 is there's something that causes inflation. The Fed raises interest rates, that causes investment growth output to fall, and then inflation comes down. Somehow y'all did this in the recent cycle. We had what's been called an immaculate disinflation. Somehow inflation came down, we didn't have a recession. Do we need to rethink how monetary policy affects the economy, or is this cycle different than others? What's your opinion on that?

0:41:30.9 SC: So, and first of all, I have taught that many times to students. So I actually do not think, at least at this stage, that... I think we need to think more broadly perhaps about how we look at what some of the trajectories might be. But I don't think that we need to kind of rethink that piece of it. That's very much a story that relates to only the demand curve. If you even think about a simple supply demand, it's the demand curve part shifting. And if you constrain demand, that reduces price pressures, but it reduces quantities also. And as I talked about in my remarks, what we've seen is a number of very favorable supply developments. And if you have a supply expansion, that actually enables you to reduce price pressures, but in an expansionary environment. And so we don't, I think in... When I've taught that anyway, I didn't typically have that in mind as I was thinking about what might happen. And then on top of it, we had those unusual aspects that we went into the, that period when we started raising rates, the balance sheets of households and firms were unusually strong in part because of some of the supports from the depths of the pandemic, that excess savings that I'd seen. And so that cushioned some of the effect to some degree. So I think those special factors as well as the supply piece in particular, those are not, those are well understood, but they aren't necessarily part of the story that we've traditionally told.

0:43:18.4 JL: So you actually created quite a stir last week when you were giving a speech and you said that you weren't, that we couldn't guarantee interest rates would fall the next meeting. Can you tell us what types of data you're looking at, considerations inform these decisions going forward?

0:43:43.3 SC: Sure. So a couple parts there. I have to say I was a bit surprised by some of the focus, my view which I've expressed before and is the view I express today as well, is that some more normalization is what I would expect given what I know about the economy right now. But it's not a done deal. Decisions are made meeting by meeting and based on the data that's available at the time of the meeting. And so in some ways perhaps a bit of a surprise that something I had said before had that reaction. I do think that there are a number of things that I continue to watch, and that I'm focused on in terms of making decisions over time. And some of the things to focus on are ones that I mentioned. So ensuring that inflation expectations do remain anchored, that we aren't seeing evidence of new price pressures. I actually have a different reaction of the policy implications of understanding that past shocks are still working their way through the system. The evidence of new price pressures, I think would have different implications for how we think about policy. So those are some of the key things that I'm focused on.

0:45:14.9 SC: But I really look pretty holistically at the data. It's always hard to focus on only one or two things because we really look at all of it, both the statistical information, also the qualitative information. A lot of the statistics, the statistics tell us what happened last month, last quarter, last year. Whereas when we are talking to business owners, they're telling us what they're thinking now, they're telling us also what their plans are in terms of wage gains, what their plans are and what they're seeing in terms of their backlog for orders and things like that. And so we get a sense of where they are now and what they're thinking in the future. And that really compliments the information. So I'm kind of looking at all of it.

0:46:00.8 JL: So in your remarks, you said that you felt that current policy was still a little on the tighter side, and that the neutral rate would be something slightly lower, but uncertain. What type of considerations go into thinking about the neutral rate? What is neutrality?

0:46:21.8 SC: What I would mean by neutrality would be interest rates that are not either putting restrictive conditions, and so restricting economic activity or actually what we call accommodative so that they're actually giving a boost, right? And so the way that I think about it right now is we've had the brake on and that we've been easing up on the brake, but there's still... We're not, our foot's not off the brake pedal yet. How are we gonna figure out exactly when we're at neutral? So it's not as if it's just one number and somehow it... So we will make decisions based on how the economy is behaving, but also importantly on our outlook because, of course, policy works with lags. And so we wanna be understanding the trajectory as we're making policy decisions, understanding that the effects of the policy decisions we make at any one point in time have implications over time. So, both an understanding of where rates are, real rates adjusted for inflation, taking a look at that, talking to financial institutions about how they are seeing lending conditions, for example. Talking to firms about what their experiences are and how they're different from, in other cycle. So all of those things come together in my mind to give a picture of how tight the conditions are or not. But again, I don't think there's just one indicator or one thing you can look at. It is more of a holistic view.

0:48:06.3 JL: So the Federal Reserve accumulated, it greatly expanded their toolkit in response to the global financial crisis and the period in which interest rates were near zero. You added a lot of forward guidance, quantitative easing. Are these emergency measures that now will fade away into the sunset, or do you think these are things that will play a vital role in policy during these more normal times? When we get to the natural, things will settle back down at their natural positions.

0:48:41.0 SC: I certainly think that forward guidance, quantitative easing and then tightening are part of the Fed's expanded toolkit. At the same time, I think that their usage is likely to be more relevant in some periods than in other periods. I mean, the federal funds rate, the kind of key policy rate is the main tool, and that continues to be true. We are in the process gradually of running off the expanded balance sheet to get, to normalize there as well. And we're doing that gradually and intentionally. And so as we are in a more normal environment, you don't need that tool in the same way. And so I would think that it would be most useful in unusual circumstances. Forward guidance is interesting. We provide some information about how the 19 policymakers are thinking about things every other meeting in what's called the SEP, the Summary of Economic Projections. That's not a, that's not forward guidance in the sense of saying, "Here's exactly what's gonna happen to policy." But what it is, is some information about how policymakers are thinking about the interaction between their outlook and what they expect to happen to labor markets, to inflation, to economic activity, and the federal funds rate over time.

0:50:14.6 SC: And so that's providing some information, it's a bit of transparency. I actually think there are relatively few times where the very concrete forward guidance that people are often hoping for. People like certainty and the Federal Reserve often... Certainty is not something that is typically appropriate. We really have to make decisions based on the information that we have at each meeting. But there are times, so for example, when I first came into this role in July of 2022, interest rates were still very low. They were still accommodative. We knew we needed to get to restrictive, so it was very clear where we were going and that we needed to get there quickly. And so there was clear forward guidance that was appropriate at that time. It didn't say we're going to this level. So it wasn't as specific as exactly, this is what we'll do at each meeting, but it was much more concrete than the guidance that I think is appropriate at other times when a more gradual approach makes sense.

0:51:19.8 JL: Is it easier to give forward guidance when the direction is obvious, like in, when you arrived and interest rates were low and inflation was taking off, or when inflation was high and we knew that was coming down and we knew rates had to go down, versus now when things are getting more near the natural rate, is it natural that one would have less forward guidance?

0:51:43.7 SC: That's exactly what I'm saying. That in those circumstances when being gradual, being thoughtful, really assessing the data, understanding the risks on both sides makes sense.

0:52:00.3 JL: So I think I have...

0:52:00.5 SC: How are we doing?

0:52:00.6 JL: Time for one last question. So I'm gonna ask the big one, which is, what keeps you up at night?

0:52:10.7 SC: Well, I do think that there are some important challenges that I'm very focused on. It continues, this has been such an unusual kind of economic cycle. There've been, I've talked a little bit about some of the ways it's been unusual. There've been a number of ways it's been unusual. We talked at the beginning about the importance of the job. It matters in terms of people's wellbeing, and that's something I take very seriously. And so thinking hard about the dynamics of our economy is, I think a challenge is something I do collectively with my team and learning from others as well with a bit of humility, I think is important. And so I would say that's a challenge which keeps me very busy in the daytime. I also think that, it's clear that while the economy is in a good place overall, there are places and groups where there's less vibrancy. And that there are real challenges that are associated with understanding that and appropriately being able to perhaps support, foster collaborative activities that might help to address that. So I think those are real challenges that I take very seriously.

0:53:32.3 JL: Well, thank you very much, Susan, for coming here. We have questions from the audience, and handling those questions we have two students. I'm gonna let them introduce themselves and then we will move forward with that part of the presentation. So the floor is yours.

0:53:52.9 SC: Thank you.

0:53:57.1 Nishan: Hello. I'm Nishan, I'm a second year in the joint economics and public policy PhD program. Yeah, former Boston Fed employee.

[chuckle]

0:54:09.2 JL: That wasn't planned.

[laughter]

0:54:12.9 Drew Bluethmann: Hello, I'm Drew Bluethmann, a first year MPP student. All right. All right, so first question I have for you is, might you be able to comment a bit on how fiscal policy in the US government debt burden does or does not factor into monetary policy decision making?

0:54:39.2 SC: Sure. So the Fed is charged with monetary policy. Fiscal policy decisions are made by our elected officials, by Congress, and that's where the focus is. And so the Fed has no role in making fiscal policy decisions, at the same time fiscal policy and its implications certainly influence the trajectory of the economy. And so our models certainly incorporate the policies that have been enacted and it's part of the data that we use when we do our analyses and make our forecasts. And it's certainly important in that framework, but we don't make policy decisions about fiscal policy.

0:55:33.5 Nishan: So you mentioned in your presentation this pattern of recent job creation as well as like this increase in labor force participation. And we have a question related to whether or not you can provide some more insights on how the firms may be influencing this labor force participation, and how this may be involved in mitigating inflation.

0:56:00.4 SC: Sure. So the increase in, an increase in labor force participation expands, implies a greater growth of labor supply. And that's an input into productive activity. And so from that standpoint, as it expands supply, it means that there's more supply relative to the demand for goods, for services. That puts less pressure on prices and so that does help to alleviate inflationary pressures. So it's working through that same channel. I think that there are likely a number of factors that have influenced the rise in labor force participation for prime age workers. And again, the chart that I showed, showed that it is very broad-based. So sometimes historically you've seen an increase and then you've unpacked it and seen that most of the increase is actually concentrated among a particular demographic group or a particular region or a particular sector.

0:57:14.2 SC: And this has been much more broad-based. And so I think that there are probably many factors and there's more research to be done to understand that. And so again, some of it could relate to immigration and changes in the kind of age distribution and the kind of labor force attachment of our population. Some of it could relate to decisions that people who, you may need more earners and families with a high price level. And so it may actually reflect challenges making ends meet with more people coming into the labor force. So I think there are a variety of possibilities. Again, it's prime age, we're not seeing the increase in workers who are 55 and older. But again, those patterns can evolve and change. So I think it's an interesting area to explore and to study.

0:58:23.3 SC: And it's also true that we came through a period where firms had so much difficulty hiring. There were such extreme labor shortages. And so the outreach that many firms in different places and sectors have made to try to address that could be playing a role in some places. I've not seen research on that specifically. Many of the firms I've talked to are closer to normal in terms of their labor forces, but expect that it could be difficult if demand expands to expand hiring. So they're not necessarily seeing an expansion there, but it could be that firms' activities to try to address the shortages that they had experienced is part of what led to an increase in the labor force participation rate. So that's certainly a interesting angle to explore there. And again, for those interested in doing research, there are a lot of both qualitative and quantitative types of research projects that would be really interesting and useful here.

0:59:34.4 DB: Do you have any book recommendations, perhaps particularly for students in the audience, either for understanding the Federal Reserve or in general?

0:59:42.8 SC: Wow. So I will say I am an avid reader. At the same time, given how busy I've been the past couple of years, I've done less kind of reading other than specific reading for the past couple years than I would normally have done. So I have long been a proponent of a book called Factfulness, which is not a new book, but it's one that I think is really interesting as a way to highlight that it can be too easy to make assumptions that we know about something. And it's really a reminder that it's worth when you hear yourself starting to think you know something that you haven't actually seen much grounded information on, that it's worth actually looking at some of the data and really testing assumptions. And so that's one that I often would recommend. And so I'm always looking for other recommendations and I have piles, but I haven't gotten to as many of them as I would like to.

1:00:54.5 Nishan: So another question, your role as the Boston Fed President is multifaceted. So could you expand on how your office intersects with the various departments within the Fed and with community organizations in Boston and the greater New England area?

1:01:11.0 SC: Sure. And so the Boston Fed has about 1300 employees. So it's a reasonably large organization. It has a number of different departments with people doing various things. And I work closely with my executive team and the executive team is in touch with members throughout their departments, but I spend quite a bit of time... So I would say there's a bit of a cadence. So as we're coming up to FOMC meetings, I'm gonna spend quite a bit of time with our research department, and we do a variety of analyses. We actually invite some of the people outside of research who are doing work that is relevant from community development or from our banking group. And so we come together to do that work. When I am traveling around New England, I am working closely with members of, of course, our outreach and communications team, but also our community development team, which has many of the relationships and connections in many of the groups. So both within the building and with some of those travels, I have the opportunity to engage with experts across our bank. And I have to say it's, I've been really... I just so am struck by the commitment, the dedication to public service and the expertise of the staff at the Boston Fed. And so always appreciate the opportunity to give them a bit of a shout out. It's a pleasure to work with them.

1:02:52.6 DB: All right. I realize you may be unable to answer this, but many questions have come in related to how the new administration may affect Fed policy, whether through tariffs or immigration policy or other economic policies. How do you, or... Yeah, how do you think about the change of administration and the outlook of monetary policy?

1:03:13.4 SC: So there's so many things that we are very focused on. I don't actually try to get out ahead to make hypotheses about policies that haven't been enacted or implemented. And so when we have details about new policies that might come forward, of course we will analyze those and we'll incorporate those into our analysis. But I'm not getting out ahead. There's lots for us to focus on in our analysis of policies right now. And of course the Federal Reserve is a nonpartisan organization with a public service mission that's really dedicated to our mission and our mandate.

1:04:00.8 Nishan: Another question, we have, so how do you see emerging technologies and innovation such as blockchain or digital currencies impacting the future of the financial system and the role of the Central Bank?

1:04:14.9 SC: That's a really interesting question. As I mentioned very briefly in my remarks, the Boston Fed has an annual economic conference and we chose to focus our 2024 conference, which we held just last week, on the future of finance implications from technological innovation. And this is a fast moving field. It's very dynamic, it's very complicated, and there's a lot still to really understand. So what I will say is that it was very valuable to bring together key experts from different fields, some of the emerging models to try to understand what some of the dynamics might look like. So there are a number of places and ways that technological innovation is already influencing things and would influence things going forward. But I think it's important to recognize that technology has been influencing finance and payments for a long time, right? I remember when I was much younger, we didn't have like cash machines, right? You couldn't just go to an ATM. And I remember the rollout of that technology and initially people were a bit skeptical of. And now it's something we just take for granted. And so in fact, there has been a long history of technological change influencing how our financial system works, how our payment system works, and I think it's important to remember that.

1:05:55.9 SC: So maybe the pace is faster, maybe they're new exciting things. But I think it's also important to recognize that there is some real promise in terms of potential efficiencies. Sometimes automating things can increase efficiencies, and that can be really valuable. The ability to actually understand patterns in data can help us to make connections that might not have been made otherwise. But there also are real risks and challenges associated at the same time. There are privacy risks, there are potential implications for financial stability, there are potential implications in terms of the security of our payments in financial systems. So I think it's really important that we look both at the promise and at the challenges and kind of make very thoughtful decisions collectively as we move forward in this space. One of the things that I will talk just for a moment about is, there is promise potentially in increasing access to financial services. So there're financial inclusion opportunities. And that's, I think, something that could really help to expand the vibrancy of our economy in ways that really benefits us very broadly.

1:07:28.2 SC: And FedNow could be a part of that if you think about the ability to get your paycheck immediately and then be able to pay a bill without going to a non-bank bill pay, that actually gives you the security of knowing that the payment actually got made, but for a very high cost. And so there's a potential for services like FedNow to be able to enable just in time management of resources and helping families and small businesses to be able to do that effectively. But at the same time, there are other challenges as well. So that's a really important area. And for those who are interested, the sessions and materials from our conference are available on our webpage.

1:08:12.0 JL: Can you explain briefly what FedNow is?

1:08:16.2 SC: Yeah. So FedNow is the name for this new infrastructure. And so essentially your bank and about a thousand banks have already done this, and we are working with other financial institutions. So your bank can join, adopt the service. And that requires having the technology and being able to have the staffing to be able to support 24/7 financial transactions, which is not how many financial institutions are currently set up. So there's some backend work that institutions have to do, and we support that. But that would then enable your financial institution to be able to support real-time, just in time payments, immediate payments 24/7. So it's a...

1:09:05.1 JL: So the difference would be normal payments take time to clear, and this is immediate?

1:09:11.8 SC: This is immediate and... Exactly. And that service which is available to all of the banks, small community banks, regional medium-sized banks, large banks is important. And so that ubiquity, the potential for that is one piece of the promise.

1:09:38.6 DB: How would you describe the Federal Reserve's role in influencing reduction in nationwide poverty and income inequality?

1:09:48.0 SC: I would say that, let me say two things about that. Part of our dual mandate is maximum employment. And the way that I think about maximum employment includes understanding some of the barriers that people face to participate in our economy. And it's some of those barriers that our community economic development team is interested in, that some of our research is focused on. And have talked a little bit about some of those examples. So we don't directly focus on transfer programs or... I mean, that's fiscal policy. So there are a number of types of policies that are outside of the Federal Reserve's purview that might more directly focus on inequality and on some of those kinds of disparities. But understanding them links directly to the maximum employment part of our mandate and to fostering a vibrant economy. And so through some of the kinds of programs that I've mentioned, we do work collaboratively with others in order to try to help understand and address them.

1:11:05.3 Nishan: So how much, if at all, do you see future improvements in data collection and current improvements in data collection influencing the research at the Fed and Fed economic policy decisions?

1:11:19.2 SC: The data is critical for the work that we do. And so it's certainly something that is really important to us. One of the things that has been extremely, and meeting with the different agencies that are charged with the official statistics, working, understanding the work that they're doing, that's vital and it really does underpin, so things like the labor market report, things like the PCE numbers, the personal consumption expenditure, our inflation data, understanding the GDP, so all of those releases and the data that underpins them is really critical to the work that we do. There's a lot of other data that we look at as well. And so when we were in the pandemic, things were happening in real time, and so there was a lot of creativity to try to think through, is there other kinds of information that could give us information, that could give us some insight into how the economy was evolving. And so looking more broadly at the types of data that might inform the decisions that we're making in our understanding, I think is a really interesting area. And so let me just say a little bit about some of the kinds of data. So, there was data on cell phone locations to try to understand where people were to get some real-time information about shopping and other kinds of things. So that was something that the Fed would not have looked at before.

1:13:00.2 SC: It was also... We now look routinely at things like indicators of supply constraints. Now, there were lots of folks who were focused on networks and supply constraints before, but it wasn't necessarily something that the FOMC tended to focus on, but it's become very clear that supply constraints can have major macro effects. And so that is now part of the data that I routinely look at as part of this. And there's also discussion, are there ways to use AI with the large language learning to get information about how firms or others are thinking about parts of the economy? And there are opportunities there as well. So there are call reports that happen on a quarterly basis and trying to get an understanding of what kinds of topics are top of mind across particular sectors and how that evolves over time could be an interesting data source. And so my point is essentially that there's a lot of data that we already have. It's really important and its integrity really matters. And then there are new data and other opportunities to get additional insights, and I think that's a really interesting development and dynamic right now. So, love questions about the data.

1:14:29.6 DB: All right. For much of the time between 1980 and 2020, the Fed's role seemed to be demand management in light of stable supply, but as you noted, supply has been critical to the inflation dynamics since 2020. What have we learned about the role of supply in influencing inflation? Does this have implications for monetary policy going forward?

1:14:55.2 SC: So first of all, I think that the period that we have, are still in, are still going through, I think there will be things to analyze for some time. So often you need the history to be able to do the full analysis. And so I think our understandings now are still evolving and somewhat preliminary. I do think that the kind of reminder that supply scenarios can play a key role, that's very top of mind certainly for me. I said earlier that we don't know whether the productivity growth increase that we've seen will be sustained, but the dynamic that we've seen, to me makes it a priority to unpack that and to look at it a little bit more closely and to get some additional information. So I do think that there will continue to be things that we learn from the experience that we've had. And there've been, dimensions that have been unusual I've mentioned some of the special factors as well. It's very hard with one episode and a number of different special factors to parse out how much of the impact was any one of those things. And so that's part of why having more time and perhaps down the road other experiences that we can compare enables you to actually tease out the relative importance. So I see some of the takeaways that we can draw now as being somewhat preliminary.

1:16:42.8 SC: You know, you still do the best, you make the best assessment given the information that you have, and that's certainly what I and my team do and what we're trying to do. But it continues to be important in having research that uses different assumptions to do the analysis and discusses how the takeaways might be sensitive or not is really valuable and important. And the research done in universities can help with that and research done across the system and other places as well.

1:17:16.5 Nishan: Okay. So this will be our last question. And just to consolidate a little, we've gotten a couple questions about local and regional banks, and both their role in the economy and about the Fed's, the Boston Fed's role in supporting local and regional banks. So what are the... What costs might there be in the consolidation of the banking industry and the, and fewer, and lowering the amount of local or regional banks?

1:17:41.2 SC: So it is true that over time, if you go back 20 years, there were more banks in the US economy, there has been a consolidation over time. I also really wanna stress the value of banks of all sizes in our economy. So, in particular, our community banks that are very engaged in their local communities play a key role through the relationships that they have in terms of supporting local initiatives, which can be small. So some of the small businesses can find it more difficult to get financing from larger institutions. And sometimes there are initiatives or entrepreneurs that don't have the track record and history, but with more knowledge of information, community banks can make decisions very effectively to help support. And so some of the vibrancy from local communities has been supported by small banks. And so banks of all sizes have been really, I think, critical to the vibrant economy that we've seen. And at the same time, there are pressures in different ways as technology has changed, as demands or the kind of expectations of those who use banks evolve. And so that leads banks to make different decisions in terms of whether merging makes sense or not. And so that's certainly something that the Federal Reserve is part of. Supervision, certainly oversees the safety and soundness of our banking system and recognizes, again, the value of banks of all sizes, which can be healthy and vibrant and make strong contributions to our local economies.

1:19:42.5 SC: In terms of our local economy more generally, the Boston Fed is very focused on our engagement across the community. I see we still have the slide, at least up in the back, of some of the pictures of me. And that engagement is really important for so many different reasons, both to help inform monetary policy decisions to help better understand how our economy is evolving, what the challenges are, what the opportunities are, also to support some of the community economic development activities that I mentioned. And that includes engaging with community banks. I've met with groups of community bankers. I've met with large, with regional bank groups, state organizations that bring their bankers together and talk about particular challenges and opportunities within their regions as well. And I see all of those as extremely valuable, informative, and a key part of what we do to fulfill our mission and our mandate. Thank you. It's been just an absolute pleasure to be back home in the Ford School. And so thank you so much for wonderful questions.

1:20:57.4 JL: Thank you, Susan.

[applause]

1:21:08.8 JL: Consolidation of the banking system, I was thinking I had the same bank account I had in college. It was at Bank of New England, which was bought by Bay Bank, bought by BankBoston, bought by Fleet, bought by Bank of America. And so basically the same account is now, it still causes problems because I need to get all my foreign transactions run through Massachusetts, but...

[laughter]

1:21:40.2 SC: Love the Boston connection.

1:21:40.7 JL: Thank you, Susan.

1:21:42.4 SC: Thank you all.