Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Authoughts podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe. Why isn't thal Joe?
Speaker 2: We're in Boston.
Speaker 1: I know.
Speaker 3: We've never done an odd lotch thing in Boston of
Speaker 3: any sort, have we?
Speaker 2: No, this is actually my first time in Boston. I've
Speaker 2: been to the airport a few times, but I've never
Speaker 2: actually stayed in the city. And everything I know about
Speaker 2: Boston comes from the Boston New York rivalry as depicted
Speaker 2: in thirty Rocks. So I know nothing basically, you know what.
Speaker 3: And I lived in Vermont for several years in high school.
Speaker 3: Boston that was the big city. Like people in like
Speaker 3: people aspire to go to Boston and when people I
Speaker 3: knew a lot of people went to college here and
Speaker 3: stuff like that. I love it here. I'm excited to
Speaker 3: be here.
Speaker 2: You know. The big city closest to my house in
Speaker 2: Connecticut is Worcester, Massa Tuessetts.
Speaker 3: That's the big one. That's a niceity.
Speaker 2: It's about forty minutes away. So all right, Well, the
Speaker 2: reason we are here is for the Boston Fed, which
Speaker 2: is holding their sixty ninth Economic Conference, and the theme
Speaker 2: of this year's is the US economy in a changing
Speaker 2: global landscape, which is putting it mildly.
Speaker 3: I think it is putting it mildly. There's a lot
Speaker 3: going on globally, all kinds of things. You could just
Speaker 3: run down the list. We don't even have to summarize it.
Speaker 3: But it is a time of change, both macro big
Speaker 3: picture globally, but also just for the near term. Direction
Speaker 3: of monetary policy right now in the United States probably
Speaker 3: as as ambiguous as it's been in a while.
Speaker 2: Yeah, I think so. And we're seeing that reflected in
Speaker 2: a lot of the Fed speak that's been coming out
Speaker 2: at the moment. We have doves on the one side,
Speaker 2: who are talking about a deteriorating labor market, and then
Speaker 2: we have hawks on the other side who are still
Speaker 2: very concerned that basically, after five years of inflation, we
Speaker 2: have still not returned to the two percent target.
Speaker 3: It's been half a decade, right and as of right
Speaker 3: now recording this November nineteenth, twenty twenty five, the work
Speaker 3: function looking at FED fund futures gives about a forty
Speaker 3: five percent chance of a rate cut in December. That
Speaker 3: was in the high sixties just a couple of weeks ago.
Speaker 3: So a lot of things, a lot of uncertainty, more
Speaker 3: or less a coin flip right now. We don't know
Speaker 3: what's going on in the medium term or the long term.
Speaker 2: I'm going to say one more thing before we get
Speaker 2: to our very esteemed guest. But there is another complication,
Speaker 2: which is we've had the government shut down, right, so
Speaker 2: we haven't had a lot of the economic data. By
Speaker 2: the time this episode comes out, there might have been
Speaker 2: some of the economic data, but we also have FED
Speaker 2: minutes that are due out later today. But to emphasize,
Speaker 2: as of this morning, everything is very very uncertain.
Speaker 4: Uh.
Speaker 3: The fog, that's like the term everyone's using.
Speaker 2: Yeah, there's a little bit of fog out in the
Speaker 2: Boston Harbor right now as well, so fog fog everywhere. Okay, So,
Speaker 2: without further ado, we have the perfect guest to talk
Speaker 2: about the changing US economic landscape and what it means
Speaker 2: from my arry policy. We're going to be speaking with
Speaker 2: Boston Fed President Susan Collins. So, Susan, thank you so
Speaker 2: much for coming on all thoughts.
Speaker 4: I am delighted to be here and welcome to Boston.
Speaker 2: Thank you so much. I heard I'm supposed to eat
Speaker 2: beans and lobster.
Speaker 4: Is that right?
Speaker 2: All right, I'll do that all of it. Okay, perfect?
Speaker 2: So tell us firstly about this research conference. What's the
Speaker 2: purpose of the FED gathering people together to talk about
Speaker 2: you know, you have a series of papers here, all
Speaker 2: with different themes and topics. Why do this?
Speaker 4: Sure happy to talk about our conference. And I have
Speaker 4: to say, I and our entire team are delighted that
Speaker 4: you are both going to be joining us for our
Speaker 4: day and a half conference.
Speaker 2: We can't say no to a conference full of academic
Speaker 2: economic papers.
Speaker 4: Well, it will be quite meady and informative. You know,
Speaker 4: it's not just academics, and that's one of the things
Speaker 4: that I think is really important to us and one
Speaker 4: of the things that makes it particularly valuable. So we
Speaker 4: bring together and this is the sixty ninth Boston Conference.
Speaker 4: It's our flagship. You know, we do other meetings and
Speaker 4: conferences and other things, but this one is our flagship.
Speaker 4: And we bring together academics, certainly, we bring together policy
Speaker 4: makers from different institutions, We bring together business leaders. We
Speaker 4: have a wide range of people. We actually have people
Speaker 4: from different disciplines. So one of the papers is from
Speaker 4: a political scientist as well, so that is as kind
Speaker 4: of a hallmark of the conference is to really do
Speaker 4: a deep dive to understand dimensions of a topic. And
Speaker 4: we picked a pretty big one this time. So I'm
Speaker 4: not going to suggest we're going to cover the entire thing,
Speaker 4: but understanding the US economy in what is a changing
Speaker 4: global landscape related to risks and uncertainties, to fragmentation. It's
Speaker 4: a lot to talk about, and I'm really looking forward
Speaker 4: to being part of it, to learning and to hearing
Speaker 4: the presentations.
Speaker 3: I don't want to create any tension between you and
Speaker 3: the fellow regional FED president, but doesn't it feel like
Speaker 3: Kansas City cheats a little bit by having their conference
Speaker 3: in Wyoming and August, et cetera.
Speaker 2: Like I we're in Boston in November, which is great.
Speaker 4: And it's lovely here, and it's lovely with Boston in November,
Speaker 4: but I.
Speaker 3: Always feel like it's kind of cheating. That's like, oh,
Speaker 3: we're not even going to have it in our in
Speaker 3: the exact location, and we're going to have it some
Speaker 3: in the middle of summer in this beautiful location. It
Speaker 3: is kind of cheating a little bit.
Speaker 4: Well, you know, the Jackson Hall conference is a very
Speaker 4: special one. I have been participating in that for a
Speaker 4: long time and I am a huge proponent, and I
Speaker 4: just say, the more the merrier, right, you know, it's
Speaker 4: a lot to talk about.
Speaker 3: A positive abundance mindset for conference.
Speaker 2: That's right.
Speaker 4: That's right.
Speaker 3: So let's talk Actually, you know, we'll get into we
Speaker 3: want to talk about some of the big themes we
Speaker 3: want to talk. Let's talk a little bit of near
Speaker 3: term monetary policy, et cetera. Odds of a December cut
Speaker 3: have come in dramatically because you and some of the
Speaker 3: other members of the FOMC have been talking about this
Speaker 3: concern that inflation remains stubbornly over target. That big said,
Speaker 3: there does seem to be a lot of evidence of
Speaker 3: labor market weakening, right, And we haven't got the unemployment
Speaker 3: rate for a while, but basically every measure seems to
Speaker 3: show a significant I don't know, stall et cetera. Talk
Speaker 3: to us about your read on the labor market right now.
Speaker 3: Are you concerned that some of the weakness that we've
Speaker 3: seen could snowball into seriously deteriorating environment and a sharp
Speaker 3: increase in the unemployment rate.
Speaker 4: Yeah, So I appreciate your framing of that. You know,
Speaker 4: I have to start by saying, I'm really focused on
Speaker 4: both parts of our mandate, and that does mean the
Speaker 4: labor market, say more about that in just a hot second,
Speaker 4: but also concerns about the elevated inflation and what I
Speaker 4: hear about that and our commitment to price stability, So
Speaker 4: you know, they both really matter and I'm looking at
Speaker 4: both of them. That's really what I've been emphasizing. As
Speaker 4: far as the labor market, you know it it's kind
Speaker 4: of an unusual situation in some ways, right. I mean,
Speaker 4: what I think is pretty clear that we have seen
Speaker 4: softening in the labor market. We are pulling together all
Speaker 4: the data that we can find, but as you pointed
Speaker 4: out earlier, we don't have the official data yet. We'll
Speaker 4: get a job support from September tomorrow morning, and really
Speaker 4: eager to see that, and so it's hard to tell
Speaker 4: how much that softening has been, but I do think
Speaker 4: it's clear it reflects both labor supply growth having slowed
Speaker 4: pretty notably, but also labor demand growth. And so so
Speaker 4: far it seems, and again we'll learn more that there's
Speaker 4: a kind of rough unusual balance there, and so we
Speaker 4: haven't seen a significant unemployment change, But that's something I'm
Speaker 4: watching really carefully and I'm really attuned to.
Speaker 3: Just to follow up though on we have not seen
Speaker 3: a significant unemployment change, setting aside the data which is
Speaker 3: going to be noisy for all kinds of reasons because
Speaker 3: that's September, which is ages ago, and then the data
Speaker 3: after that will be affected by the government shutdown itself,
Speaker 3: which why we're't getting data. So who knows how long
Speaker 3: it'll be until we have cleaned data. But that being said,
Speaker 3: do you have any way to anticipate actual deterioration because
Speaker 3: the concern is that once the unemployment the layoffs really
Speaker 3: starts to snowball, then they start to feed on each
Speaker 3: other and they accelerate, and people talk about nonlinearity potential.
Speaker 3: Do you are you concerned that by waiting or too
Speaker 3: much for the data to reveal oh the weakness is here,
Speaker 3: that you won't have been able to get around get
Speaker 3: in front of a deterioration.
Speaker 4: It's really important to be forward looking. And as you say,
Speaker 4: I also have seen past episodes where there's been a
Speaker 4: dynamic which can move quickly, and so it's important to
Speaker 4: recognize that. So are there risks on the labor market side, absolutely,
Speaker 4: and that's something that I'm attuned to. But that's not
Speaker 4: the only consideration in terms of making monetary policy decisions.
Speaker 4: It's really about balancing those risks and looking at to
Speaker 4: the best of one's ability, you know, how do you
Speaker 4: assess which of our goals from cos is further away?
Speaker 4: And I think that the reasons that you're talking about,
Speaker 4: some of that shift in risks, increase in risks in
Speaker 4: the labor market was a good reason for the easing
Speaker 4: the fifty percent basis point cuts that we have already
Speaker 4: done this fall, and I think that that has actually
Speaker 4: positioned us given what I know now and obviously still
Speaker 4: watching for lots of caveats, and so I think that
Speaker 4: the shift in that balance of risks that I started
Speaker 4: being quite focused on over the summer was really a
Speaker 4: rationale for those cuts that we've already seen. At the
Speaker 4: same time, we have now moved much closer to a
Speaker 4: neutral rate, and we're balancing those risks on the labor
Speaker 4: market side with continued risks related to inflation and elevation,
Speaker 4: and policies really only mildly restrictive in my view, And
Speaker 4: so I given what I'm seeing so fartinue to see
Speaker 4: that as appropriate for now.
Speaker 2: We're going to get into each one of those points.
Speaker 2: But I have a very quick process question, and I
Speaker 2: realize we're in unusual circumstances at the moment. But when
Speaker 2: the jobs number hits, presumably tomorrow on Thursday, again, we're
Speaker 2: you know, we're recording this on Wednesday, November nineteenth. But
Speaker 2: when it comes out, what actually happens? What do you
Speaker 2: do when you see that number? Do you, you know,
Speaker 2: immediately go into analysis mode? Do you start calling fellow
Speaker 2: FED presidents and talking about what it means?
Speaker 4: That's a great question. So you know, of course, we
Speaker 4: have busy schedules and all kinds of other things going on,
Speaker 4: and sometimes when the data hits, I'm in other meetings
Speaker 4: or with other groups. I am well aware of when
Speaker 4: it is due, and we do have a process. I
Speaker 4: have a very strong Boston research team of experts, and
Speaker 4: so you know, as soon as the numbers come out,
Speaker 4: I do try to take a quick look at them,
Speaker 4: and then we are sometimes virtually and you know, get
Speaker 4: together relatively quickly to assess what we're seeing in those numbers.
Speaker 4: So I have help to try to unpack them. Often
Speaker 4: the real information is in the details. It's not necessarily
Speaker 4: just the headline number. In fact, that can mask a
Speaker 4: lot of what's really interesting about the information. We then
Speaker 4: take some time to unpack it, and we want to
Speaker 4: contrast those data with what we had already seen, right,
Speaker 4: because you're adding new information. It's not going onto a
Speaker 4: kind of totally clean palate, right, it's additional information. So
Speaker 4: we're doing all of that, and I'm working with my team,
Speaker 4: and then I do, of course talk to my colleagues
Speaker 4: as well. But the immediate analysis is more within our
Speaker 4: teams in each of our reserve banks.
Speaker 2: And one more process question. But it strikes me that
Speaker 2: one of the unusual features of our very unusual environment
Speaker 2: at the moment is just the sheer amount of FED
Speaker 2: speakers that we've had in recent days. I started counting
Speaker 2: them up yesterday and I got nine in less than
Speaker 2: a week. And I think than our friend Tom Barkin,
Speaker 2: friend of the pod, put out a speech or a
Speaker 2: research note as well, so that brings it up to
Speaker 2: ten in less than a week. What's going on? Why
Speaker 2: does everyone have the urge to sort of stake their
Speaker 2: ground ahead of a meeting that you know, the market
Speaker 2: currently implies could be a coin flip.
Speaker 4: Well, all the more reason to hear a range of views.
Speaker 4: I mean, I think one of the strengths of the
Speaker 4: structure of our federated system is it really does bring
Speaker 4: different viewpoints. And you know, it's interesting because sometimes there's
Speaker 4: a claim that there's too much group think. I don't
Speaker 4: see group think. I see this week. No, No, I
Speaker 4: really don't. And so I think we have also a
Speaker 4: responsibility to explain what we're seeing, how we're thinking about things,
Speaker 4: and that's part of that communication that we do. And
Speaker 4: so I actually think that's important, and I think recognizing
Speaker 4: that the breadth of views is partly us coming together,
Speaker 4: is sharing information, and as part of that process, they're
Speaker 4: different windows. When I think you hear lots of speeches.
Speaker 4: This is certainly not an isolated time, but it's when
Speaker 4: there's you know, kind of less clarity, perhaps when they're
Speaker 4: turning points in the economy, when you're more likely to
Speaker 4: see many of us out there talking about what we're seeing,
Speaker 4: also talking about how our regional information contributes to that
Speaker 4: in different ways. And we're often talking while we're out
Speaker 4: in our regions connecting with different people, and so there's
Speaker 4: kind of multiple dimensions about why we're out and about
Speaker 4: and what we're doing.
Speaker 3: Let's talk about inflation. So core PCE as of the
Speaker 3: August reading, which again feels like ages ago now, but
Speaker 3: it's the data that we have came into two point
Speaker 3: nine per ten. So that's clearly elevated solidly above target.
Speaker 3: You know, if you just hit like a snapshot, you're
Speaker 3: looking at the unemployment rate, you're looking at the inflation
Speaker 3: reading that two point nine percent. How much does the
Speaker 3: significance of that change because it comes after years of
Speaker 3: missing the inflation target to the upside versus if we
Speaker 3: just had the snapshot, Like, how much of your thinking
Speaker 3: is sort of informed by the fact that not only
Speaker 3: has it been high, but it's been high for a
Speaker 3: really long time.
Speaker 4: I do think that the longevity of that elevation is
Speaker 4: a key factor to figure. It's hard to, you know,
Speaker 4: to put a particular weight on that, but I think.
Speaker 3: About the balance of risks.
Speaker 4: Yeah, but so let me say a few things on
Speaker 4: the inflation side. But first related to that specific question.
Speaker 4: You know, I do think that it is a bit
Speaker 4: of a reminder that it's economic behavior that is not
Speaker 4: you know, one hundred percent predictable, and many of our
Speaker 4: analyzes that are based on periods when people were really
Speaker 4: used to very low inflation, maybe a bit noisier signals
Speaker 4: of what kind of responses and changes we're going to see.
Speaker 4: And so I do think that complementing those analyzes, you know,
Speaker 4: of course, those are extremely valuable, and we continue to
Speaker 4: look at total We're all data geeks here, you know,
Speaker 4: that's kind that's kind of what we do with the conversations.
Speaker 4: We have understanding how businesses are thinking about things, and
Speaker 4: so I hear that businesses are mindful that they have
Speaker 4: raised prices significantly over recent years. They're concerned about what
Speaker 4: consumer responses will be. I've recently been hearing a number
Speaker 4: of firms, at least in the New England district, the
Speaker 4: Boston Fed's district, which is most of New England, saying
Speaker 4: that that they have been passing price increases and they
Speaker 4: have been perhaps surprised in some cases that consumers are
Speaker 4: not pushing back, and that's leading them to expect that
Speaker 4: they might continue to do that.
Speaker 1: You know.
Speaker 4: So I think that gathering a range of information to
Speaker 4: complement how what our understanding of behavior is important, and
Speaker 4: that does factor into some of the scenarios I think
Speaker 4: are plausible, they're not necessarily my baseline. My baseline scenario
Speaker 4: on the inflation side is that inflation's likely I think,
Speaker 4: to stay elevated through the rest of this year into
Speaker 4: early next, and then as tariffs work their way through
Speaker 4: the system, which I think is going to take some time,
Speaker 4: and I'm happy to talk more about tariffs suspect we
Speaker 4: may want to come back to that. Absolutely, you know,
Speaker 4: I think that the disinflation process, perhaps slow and uneven,
Speaker 4: that we had seen earlier, is likely to kick in.
Speaker 4: So my baseline is a relatively benign one, both on
Speaker 4: the inflation side and on the real side of the economy.
Speaker 4: But I don't rule out scenarios where there's a larger
Speaker 4: increase in inflation or there's more persistence. And some of
Speaker 4: that has to do with behavioral responses that might reflect
Speaker 4: having been in an elevated environment for a long time
Speaker 4: and concerns about profit margins, concerns about catching up to
Speaker 4: some of the past changes, and how people think about
Speaker 4: price levels, which is something that many of our models
Speaker 4: are not as focused on. I hear a lot about
Speaker 4: price levels when I'm out and about, but high cost
Speaker 4: of living, housing in particular, but not only childcare, food
Speaker 4: that that is the number one challenge that I hear
Speaker 4: about when I'm talking to people, particularly and moderate income communities.
Speaker 4: But not only so.
Speaker 2: Since we're at a research conference at the Boston Fed,
Speaker 2: I need to bring up a really good research paper
Speaker 2: that came out of the Boston Fed back in October,
Speaker 2: I think, and it was looking at inflation expectations now
Speaker 2: and comparing them to what happened in the early and
Speaker 2: late nineteen seventies. And the finding was that the rise
Speaker 2: in inflation expectations around COVID might not have had that
Speaker 2: much to do with actual prices, but actually outran the
Speaker 2: prices and sort of became de anchored a little bit
Speaker 2: from reality, which is what we saw on the late
Speaker 2: nineteen seventies. Is the concern that people, you know, after
Speaker 2: five years of above target inflation, after price levels going up,
Speaker 2: as you just put it, that our expectations for inflation
Speaker 2: start to become unmoored from reality. Is that the nightmare
Speaker 2: scenario for you at the moment.
Speaker 4: It certainly would be a concern if I were to
Speaker 4: see evidence that especially medium to longer term inflation expectations
Speaker 4: were becoming an unmoored I'm not seeing that right now,
Speaker 4: but it is something I watch carefully, and I do
Speaker 4: think that at least certainly so far. And my baseline,
Speaker 4: as I said, is on the more benign side. You know,
Speaker 4: it's not expecting that that would happen. In particular, we're
Speaker 4: not seeing those labor market pressures with a softer labor market.
Speaker 4: But is it a concern? Is it something to watch carefully?
Speaker 4: It is, and you know it's something that I know
Speaker 4: some are more concerned about than others.
Speaker 2: Well, talk to us about how tariffs play into inflation expectations,
Speaker 2: because this seems to be a difficult one to call.
Speaker 2: You have the initial rise in prices, and then no
Speaker 2: one is quite sure what happens after that. The consensus
Speaker 2: seems to be that it's this one off shift and
Speaker 2: then you know, inflation should start to cool. But on
Speaker 2: the other hand, we're hearing a lot from consumers, as
Speaker 2: you say, about price levels themselves.
Speaker 4: So quite a bit to say about tariffs. So you know,
Speaker 4: let me unpack a few of the things that are
Speaker 4: really top of mind for me. One is when certainly
Speaker 4: when I say that, you know, my baseline expectation would
Speaker 4: be that tariffs have a one time impact on prices.
Speaker 4: One time doesn't mean it just happens in a week
Speaker 4: and it's done that one time can get implemented over months,
Speaker 4: a year, something like that. It just says that it's
Speaker 4: not expected to be a continual increase. Once the level
Speaker 4: has adjusted, did you don't get additional impacts, but that
Speaker 4: can happen over time. So that's one point. And I
Speaker 4: do think that in a period of high uncertainty and
Speaker 4: the tariffs are really intertwined with uncertainty something to come
Speaker 4: back to and the long elevation of higher prices that
Speaker 4: we were just talking about, you might actually expect the
Speaker 4: time for businesses to pass things through to be elongated, right,
Speaker 4: And so then you start worrying more that people get
Speaker 4: used to these continual price increases and you kind of
Speaker 4: get stuck. Right. So that's a scenario, again not my baseline,
Speaker 4: but is one that I think one could think about.
Speaker 4: So a few things about tariffs. One is the tariffs
Speaker 4: are really intertwined with uncertainty, which makes you know it's
Speaker 4: uncertainty about the tariffs, which is one of the key
Speaker 4: things that's having influence. For example, in terms of hiring decisions,
Speaker 4: spent decisions, some of the reticence that firms have to
Speaker 4: make major decisions and projects, and also in terms of
Speaker 4: teasing out empirically right, it's going to take some time.
Speaker 4: Our staff at the Boston FED is doing quite a
Speaker 4: bit of work on a variety of dimensions, and that
Speaker 4: includes analysis that takes into account that, you know, many
Speaker 4: of the tariffs are impacting imported intermediates, and so there
Speaker 4: are multiple dimensions and levels and you've got to take
Speaker 4: all of that into account. And we're also doing a
Speaker 4: lot of analysis on what happened in twenty eighteen. What
Speaker 4: can we learn from that, because we've had enough time
Speaker 4: that's elapsed, and actually one of the papers at our
Speaker 4: conference will be drawing some of the lessons from a
Speaker 4: kind of more comprehensive analysis of that experience. You know,
Speaker 4: just one thing that they've already been talking about is
Speaker 4: then it was a much smaller tear of increase, It
Speaker 4: was narrower, and it was implemented over a relatively short
Speaker 4: time period. It still took five months or more before
Speaker 4: the peak impact on price levels was seen, and there
Speaker 4: are reasons to think it might take even longer this time,
Speaker 4: and then the survey data when we're doing survey data
Speaker 4: at the Boston FED, particularly focused on small businesses, which
Speaker 4: isn't a group we don't have as much line of
Speaker 4: sight into, and the conversations that I've talked about that
Speaker 4: helps to inform things. And then just one final thing,
Speaker 4: because I think it's both intellectually interesting, you know, if
Speaker 4: I put my academic hat on, but also really important.
Speaker 4: We've also seen significant increases in productivity, and that is
Speaker 4: interacting with some of the tariffs, perhaps offsetting the extent
Speaker 4: to which we're seeing the impacts of tariffs on prices,
Speaker 4: because productivity growth is actually an opportunity not to pass
Speaker 4: things through because it enables you know, cost savings, et cetera.
Speaker 4: So there's a lot of things going on with tariffs
Speaker 4: which make them hard. I think this is going to
Speaker 4: be an area we will be able to we will
Speaker 4: continue studying and learning about for some time to come.
Speaker 3: I like your characterization of I guess maybe you'd call
Speaker 3: it the long one off, right. There can be a
Speaker 3: one off, but it doesn't just mean the price level
Speaker 3: resets from today to tomorrow. It could just be the
Speaker 3: sort of long process where some new equilibrium is formed
Speaker 3: maybe months, maybe years, et cetera. I'm really interested, though,
Speaker 3: in those conversations that you have with New England businesses
Speaker 3: about tariffs. You mentioned perhaps some of their surprise that
Speaker 3: they were able to pass on price increases to the
Speaker 3: degree that they have. What else are companies saying about
Speaker 3: sort of the operational effects, the day to day effects
Speaker 3: of how they're managing their business in light of tariffs.
Speaker 3: What substance of things do you hear about, So.
Speaker 4: A number of different, number of different things. A lot
Speaker 4: of the tariff conversations that I've had really are intertwined
Speaker 4: with navigating uncertainty. So one of the things that you know,
Speaker 4: I've heard is it's challenging to navigate and make adjustments
Speaker 4: based on a very different tariff level. But if we
Speaker 4: knew exactly what it was and it was going to
Speaker 4: stay there, that would be much easier to adjust to.
Speaker 4: Then back and forth and uncertainty, and that creates some hesitancy.
Speaker 4: It also creates or adds to, because I think this
Speaker 4: was already there, what I'm calling almost an efficiency mindset
Speaker 4: where firms are reticent to hire because they're not sure
Speaker 4: how things are evolving, and tariffs are a cost increase
Speaker 4: to the extent that you can offset that through efficiencies,
Speaker 4: that is one way forward that it's almost kind of
Speaker 4: like a no regrets type of investment, because whatever happens
Speaker 4: with the tariffs, if you found efficiency improvements, that will
Speaker 4: have been a helpful kind of context. So that links
Speaker 4: up with AI. But it's certainly not only AI. It's
Speaker 4: production processes, it's automation. It's addressing some longer standing areas
Speaker 4: where it was difficult to hire be because of skilled shortages.
Speaker 4: So a number of things that I have been hearing
Speaker 4: since I started in the role in twenty twenty two
Speaker 4: continue and then there's this additional set of things that
Speaker 4: are added on. So for many businesses, especially the larger ones,
Speaker 4: I actually hear some kind of cautious optimism as they
Speaker 4: look out ahead. It depends someone on the sector or
Speaker 4: some differences, and it depends what some of the global
Speaker 4: linkages are and some of those other competitive effects. But
Speaker 4: I've heard quite a bit of that and a bit
Speaker 4: more stress and concern among some of the smaller firms
Speaker 4: in some places, and so that's part of why we're
Speaker 4: trying to add to the information there through a quarterly
Speaker 4: Small Business Survey that we started doing recently.
Speaker 2: I hesitate to ask too many theoreticals here, but I
Speaker 2: think this has actually become less of a theoretical recently.
Speaker 2: But there is a good chance that the Supreme Court
Speaker 2: strikes down a big chunk of these tariffs. How would
Speaker 2: you as a policymaker actually deal with, you know, the
Speaker 2: proximate cause of this one time shift of inflation suddenly
Speaker 2: being put in doubt. And then on top of that,
Speaker 2: you also have more uncertainties on the margin about whether
Speaker 2: or not people might get tariff bonuses, and then whether
Speaker 2: or not businesses would receive refund checks if the tariffs
Speaker 2: were struck down by the Supreme Court. That seems like
Speaker 2: a very complicated scenario to be thinking about, and much
Speaker 2: less planning for.
Speaker 4: There is considerable uncertainty in this space, as you just
Speaker 4: pointed out, and you know, I don't know how things
Speaker 4: will unfold, and for some of those things, I think
Speaker 4: recognizing the uncertainty and making assessments based on the things
Speaker 4: that we know to some extent looking at scenario planning,
Speaker 4: but some of the really hard to ferret out how
Speaker 4: things would unfold. It may not be helpful to get
Speaker 4: too far ahead of that so you know, again to
Speaker 4: your point, the uncertainty remains elevated, maybe the nature of
Speaker 4: the uncertainty is shifted in some ways, and it's something
Speaker 4: that I think firms, households, local governments are navigating quick question.
Speaker 3: Even with the slowdown in hiring, et cetera, and the
Speaker 3: sort of big changes of the labor market in the
Speaker 3: last few years, do you still regularly hear about skilled
Speaker 3: labor shortages?
Speaker 4: I do in some sectors, in some areas. And let
Speaker 4: me give you a couple of examples. So, for you know,
Speaker 4: parts of New England. New England is actually aging faster
Speaker 4: than the rest of the country. That's one of our
Speaker 4: distinguishing features. We're you know, quite seasoned and we have
Speaker 4: many wonderful advantages. And so there are places where they're
Speaker 4: is more of almost a labor shortage. There's some skilled
Speaker 4: areas where firms continue to tell me maybe it's gotten
Speaker 4: a bit easier, but it's still challenging to hire for
Speaker 4: certain kinds of trades. And so one of the things
Speaker 4: that I've been really inspired to see are innovative collaboration. So,
Speaker 4: for example, in eastern Connecticut related to skilled manufacturing, pulling
Speaker 4: private sector together with higher education and support across local
Speaker 4: public sector, bringing people together to solve those problems and
Speaker 4: to identify pipelines. You know, the Cape Cud Community College
Speaker 4: has one too. They're training aviation technology maintenance. They have
Speaker 4: a new, relatively new program which will soon, I believe,
Speaker 4: be the biggest in the country. And that is an
Speaker 4: area where there is a skilled shortage nationally. So there
Speaker 4: are shortages in some areas, and they are also initiatives
Speaker 4: to try to address them, which I find inspiring.
Speaker 3: So I certainly take your point obviously that you have
Speaker 3: to the FED has to be or ought to be
Speaker 3: very mindful of the fact that inflation is still above
Speaker 3: target and that there are scenarios even if they're not
Speaker 3: your base case, will become a real problem. That being said,
Speaker 3: you know, at what point is it worth cutting even
Speaker 3: if inflation is above target? Where is the labor market weakness?
Speaker 3: Have to get to say, you know what, we're not
Speaker 3: back to two percent, but that we have a real
Speaker 3: problem on the labor market side, that that becomes the priority.
Speaker 4: So they're clearly, as I mentioned before, there clearly does
Speaker 4: need to be a balance of those risks, and so
Speaker 4: I do think about how far each of our dual
Speaker 4: mandated goals is from the target, and so if.
Speaker 3: The unemployment doesn't have one, not like we have that
Speaker 3: nice two percent number on the inflation side.
Speaker 4: Yeah, so that's that is a you know, a little
Speaker 4: bit less specifically concrete than inflation. Absolutely, but I do
Speaker 4: think that we have a sense of what full employment
Speaker 4: looks like like. And you know, this is something we
Speaker 4: talked about as part of the framework review that was
Speaker 4: completed recently that you know describes that as the maximum
Speaker 4: employment that you can sustain over time that's consistent with
Speaker 4: price stability. And I think that's a helpful way of
Speaker 4: thinking about it because it also evolves over time. It's
Speaker 4: not just one number, and I think it's appropriate to
Speaker 4: think about it that way. So if we were seeing evidence,
Speaker 4: if I were seeing evidence that the labor market were
Speaker 4: notably deteriorating, I would take that very seriously and that
Speaker 4: certainly could justify you know, near term additional easing. And
Speaker 4: so you careful to kind of qualify my statements based
Speaker 4: on what I'm seeing at the moment that it is
Speaker 4: based on balancing risks. But I think it's important not
Speaker 4: to forget about the real concerns related to the inflation side,
Speaker 4: as well as staying very attentive to what's happening on
Speaker 4: the labor market side. And you know, with much slower demand,
Speaker 4: much lower hiring, even though the labor supply growth is
Speaker 4: clearly much lower as well, there is a risk that
Speaker 4: the demand would fall well below the supply growth and
Speaker 4: we would start to see more notable unemployment increases. So
Speaker 4: something to watch very carefully. And the data from September
Speaker 4: that we'll get tomorrow is helpful, you know, the initial
Speaker 4: claims unemployment, the other information that many of us are
Speaker 4: gathering and looking at as helpful as well, but you
Speaker 4: know that's still from September, and so there's more information
Speaker 4: to come.
Speaker 2: So one thing I'm wondering about the labor market, and
Speaker 2: you know, we've heard the supply argument, you know, the
Speaker 2: break even rate argument from a number of policymakers at
Speaker 2: this point. But if supply in the labor market is
Speaker 2: the issue here because of immigration or whatever, and it's
Speaker 2: about that supply rather than a deterioration in demand, shouldn't
Speaker 2: we have expected to see some tightness showing up in
Speaker 2: other statistics, like we earned hours worked, the quits rate,
Speaker 2: something like that, and we haven't really seen that yet.
Speaker 4: So I think it's both okay, right, I mean the
Speaker 4: fact I don't think we are seeing significant wage pressures.
Speaker 4: I think that's been true for a while. I think
Speaker 4: if anything, the more recent data I've seen, but again,
Speaker 4: you know, don't have the most recent information. You know,
Speaker 4: has come down a bit. It's been higher than it
Speaker 4: was pre pandemic. At the same time, given the productivity
Speaker 4: that we'd seen, that is consistent, in my view, you know,
Speaker 4: with price stability. So I have not been as concerned
Speaker 4: about the labor market, and that speaks to both demand
Speaker 4: and supply having come down, which is this kind of
Speaker 4: unusual balance that I was talking about before. I see,
Speaker 4: but looking out ahead, it's hard to really project what
Speaker 4: those trajectories will be. Will the labor demand fall more
Speaker 4: quickly than the supply has fallen, then you'd start to
Speaker 4: see the unemployment go up, but of course it was
Speaker 4: the other way around. You tend to see more wage pressures.
Speaker 3: Let's talk about AI for a second.
Speaker 2: What is it?
Speaker 3: What are the businesses that you're talking to say about there?
Speaker 3: I don't know, adoption, implementation, investment in AI, I'm all.
Speaker 3: You know, clearly it feels like everyone is experimenting everything.
Speaker 3: It's very hard to detect whether there are obvious productivity
Speaker 3: gains being seen, perhaps outside of coding and engineering. What
Speaker 3: are they telling you about their sort of their budgets
Speaker 3: and their plans for adoption of this technology.
Speaker 4: Yeah, you know so, if I think back even six months,
Speaker 4: it was a kind of interesting piece of the conversation
Speaker 4: that I would have when I'm meeting with a group
Speaker 4: of different business leaders from different sectors. It's now a
Speaker 4: significant share of the conversation, and typically there's not one
Speaker 4: of the people around the table who isn't telling me
Speaker 4: how they're thinking about it, what they're doing, what they're finding.
Speaker 4: It's out there, it's everywhere, and that's true, you know So.
Speaker 4: I was not too long ago visiting a lumber mill
Speaker 4: in northern Vermont and learned about how they have been
Speaker 4: using AI in order to sort planks, in part because
Speaker 4: they were having trouble hiring that skilled labor in that
Speaker 4: part of the country. But then they told me about
Speaker 4: all of the other benefits they were finding in ways
Speaker 4: that they were teaching it to do additional things. I
Speaker 4: hadn't expected going to a lumber mill that we were
Speaker 4: going to spend quite a bit of time talking about AI,
Speaker 4: so it's much broader. I am hearing that there are
Speaker 4: some ways that the AI is really supporting workers and
Speaker 4: enabling them to do more and be more focused, saving
Speaker 4: time in terms of reporting and a variety of different
Speaker 4: back office kinds of things. I have some people telling
Speaker 4: me that they actually expected it to enable them to
Speaker 4: grow because of some of the savings in ways that
Speaker 4: they're excited about, and then others that are telling me
Speaker 4: that it may be enabling them to downsize. I think
Speaker 4: it's still early days, and there are many, many different dimensions,
Speaker 4: and there's still a lot of experimentation, to your point,
Speaker 4: So I'm hearing all of it. It's really interesting, and
Speaker 4: I think it's much too early to tell how it's
Speaker 4: all going to play out.
Speaker 2: I hate to ask another theoretical question, but I apologize
Speaker 2: in advance a research research conference. Why not? But when
Speaker 2: you think about AI, does it make you think about
Speaker 2: the unemployment side of the mandate and the policy making
Speaker 2: capacity at the FED? And what I mean by that is,
Speaker 2: you know, traditionally you lower interest rates if you want
Speaker 2: to try to boost employment, and that's supposed to encourage
Speaker 2: businesses to invest in new capital, and historically a lot
Speaker 2: of that capital has meant additional jobs. Although we can
Speaker 2: debate automation and all of that, but when it comes
Speaker 2: to AI, you lower interest rates people invest in AI,
Speaker 2: and I think the concern is that means fewer jobs. Now,
Speaker 2: how do you think about that as someone at the
Speaker 2: FED whose primary tool is the benchmark rate.
Speaker 4: Lots of pieces to that and a lot of thinking
Speaker 4: going on, right, So let me just let me say
Speaker 4: a couple of things. So I do think that even
Speaker 4: though we're mildly restrictive, we are seeing considerable investments across
Speaker 4: a wide range of firms and sectors in AI. That
Speaker 4: is one of the things that firms are clearly leaning into.
Speaker 4: And you know, I do think of AI as a
Speaker 4: general purpose technology, which is like the Internet or like electricity.
Speaker 4: And if you go back in history, in those when
Speaker 4: those were being adopted, there was also discussion that introduction
Speaker 4: of those new technologies was going to, you know, just
Speaker 4: really eliminate a huge number of jobs. And what all
Speaker 4: the people.
Speaker 2: Lighting gas lamps are going to be unemployed?
Speaker 4: Electricity and guess, you know, and other things were developed
Speaker 4: and some of them we don't We're not imagining. Yet,
Speaker 4: so I do think that that history is important. At
Speaker 4: the same time, it does seem potentially like this general
Speaker 4: purpose technology might unfold more quickly and that could create
Speaker 4: more transition challenges. Again, it's really early days in terms
Speaker 4: of thinking about how that may play out. But I
Speaker 4: am expecting there'll be new opportunities in newb you know.
Speaker 4: I mean, when women join the labor market, the view
Speaker 4: was that will mean there are no jobs for men,
Speaker 4: and therefore and on. Obviously, what we've seen is a
Speaker 4: significant increase in job opportunities, vibrancy, and the US economy
Speaker 4: is a vibrant, dynamic economy in a number of different ways,
Speaker 4: but early days important to play out. The other thing
Speaker 4: I will say is there are a lot of things
Speaker 4: that Fed focuses on and cares deeply about because they
Speaker 4: impact economic conditions, they impact employment, they impact inflation. We
Speaker 4: need to understand them, we need to follow them, but
Speaker 4: they aren't the direct thing that our policy tools are
Speaker 4: able to influence. I think I think we need to
Speaker 4: kind of recognize and separate those things. You know. One
Speaker 4: reason to have you know, eased a bit is it
Speaker 4: could facilitate an environment where it's easier for labor to
Speaker 4: make transitions to two different kind of areas in places.
Speaker 4: So I think there are lots of considerations there. But again,
Speaker 4: this one's going to unfold over some period of time.
Speaker 4: You know.
Speaker 3: One of the things you mentioned is people don't just
Speaker 3: care about the rate of inflation. They care about affordability overall.
Speaker 3: So the price level which has gone up very significantly,
Speaker 3: and one segment of people's consumption basket that's gone up
Speaker 3: a lot in several years at the cost of housing
Speaker 3: and so forth. And this is something that comes up
Speaker 3: from time to time, which is the rate. Policy when
Speaker 3: it comes to housing can sort of cut in multiple
Speaker 3: directions because higher interest rates might you know, make mortgages
Speaker 3: more costly and you get a depression a little bit
Speaker 3: and demand and maybe that helps balance prices. On the
Speaker 3: other hand, that could also curtail development, and developers are
Speaker 3: very attuned to the interest rates. We have seen a
Speaker 3: lot of measures of housing starts come down, housing activity,
Speaker 3: et cetera. How do you think about getting that balance right,
Speaker 3: and this particularly given the salience of residents when it
Speaker 3: comes to the price level, et cetera. How do you
Speaker 3: think about optimal policy for housing supply?
Speaker 4: Yeah, housing is really important for variety of reasons. It
Speaker 4: is one of the most frequent concerns that I hear,
Speaker 4: not just for lower moderate income, right, I mean the
Speaker 4: accessibility availability is much broader than that. So you know,
Speaker 4: it matters in terms of economic vibrancy individuals households. It
Speaker 4: matters in terms of it can be a barrier to
Speaker 4: participating in the economy, right, So I worry about that
Speaker 4: from a fast standpoint. We got in the context that
Speaker 4: we're in now with real challenges with affordability, and there
Speaker 4: are lots of statistics that demonstrate the lack of house
Speaker 4: and affordability challenges over a long period of time, and
Speaker 4: it's going to take a number of different groups working
Speaker 4: together to be able to really address them. So you know,
Speaker 4: it is true that in the short run higher interest
Speaker 4: rates do have an impact. At the same time, of course,
Speaker 4: the shorter the longer term rates that are often relevant
Speaker 4: there are influenced by a number of different factors. I
Speaker 4: would say importantly, I guess two just quick things. One
Speaker 4: is that restoring and maintaining price stability and maximum employment
Speaker 4: creates an environment that's really conducive to addressing our housing challenges,
Speaker 4: and sustaining that environment, that infrastructure over time, and so
Speaker 4: it's you know, it's maintaining that broader environment that I
Speaker 4: think is what Congress has charged us to do, and
Speaker 4: that we'll create that environment. The other thing is that
Speaker 4: you know, as a nonpartisan, trusted data geekish, the FED
Speaker 4: can help to bring different groups together to share information,
Speaker 4: to help be a convener. The Boston FED hosted a
Speaker 4: conference this summer with the Harvard Center Housing Studies that
Speaker 4: put out their annual report, and we had our colleagues
Speaker 4: from eight different reserve banks. All of us are engaged
Speaker 4: and interested in working in our communities to support addressing
Speaker 4: the housing challenges. So it's top of mind, and there
Speaker 4: are things that we can influence, and then there's some
Speaker 4: things that, of course we cannot.
Speaker 2: We've been talking a lot about the economy for obvious reasons.
Speaker 2: But I am aware that we are in Boston and
Speaker 2: you are the Boston Fed President. And if there's one
Speaker 2: thing I do know about the city is that it
Speaker 2: is a financial center. There are a lot of financial firms,
Speaker 2: especially on the buyside over here. Can I ask, very quickly,
Speaker 2: how much have you been watching the markets and reflecting
Speaker 2: on what's been going on there, because of course we've
Speaker 2: had lots of talk about an AI bubble, although maybe
Speaker 2: some of the error has been kicked out of that
Speaker 2: bubble's tires in recent days and weeks. But we also
Speaker 2: have some strains in the funding markets. You know, we've
Speaker 2: seen some kerffuffles, to put it mildly, in repot and
Speaker 2: things like that. Are you watching those as well as
Speaker 2: what's happening with the broader economy.
Speaker 4: Absolutely so. You know, our teams are also very carefully
Speaker 4: watching developments in financial markets, and you know, we are
Speaker 4: seeing some more volatility certainly, you know, compared to the
Speaker 4: beginning of the year. Markets are still up, but spreads
Speaker 4: are still relatively low, and so there are a number
Speaker 4: of things to be focused on and to be aware
Speaker 4: of as we think about our broader responsibilities and charge.
Speaker 2: All right, Susan Collins, Boston FED President, We're going to
Speaker 2: try to grab you later at the conference after the
Speaker 2: jobs numbers come out and see if anything has changed.
Speaker 2: But thank you so much for coming on all thoughts,
Speaker 2: really appreciate.
Speaker 4: It a pleasure. We're delighted you're here.
Speaker 2: Joe, I really enjoyed that conversation. I think it is
Speaker 2: such an interesting time to be talking with anyone on
Speaker 2: the FED. I guess I'm still trying to wrap my
Speaker 2: head around whether the division among policymakers currently whether it's
Speaker 2: about how they see the state of the economy right now,
Speaker 2: because actually, there does seem to be a lot of
Speaker 2: consensus the labor market is deteriorating and inflation, you know,
Speaker 2: you can't deny that it is above target, or whether
Speaker 2: it's about which side of the mandate they want to emphasize,
Speaker 2: or whether it's about which side of the mandate has
Speaker 2: the potential to get out of hand basically, and you know,
Speaker 2: either rise or decrease exponentially the inflation rate or the
Speaker 2: unemployment rate.
Speaker 3: Yeah, I think that's a very good way of summarizing
Speaker 3: why there is so much debate and disagreement because a look, again,
Speaker 3: even setting aside the data blackout from the official sources,
Speaker 3: there's confusion. But then you add in the data blackout
Speaker 3: and then the questions about look, I mean, the labor market.
Speaker 3: The risk to the labor market is that sort of nonlinearity,
Speaker 3: right that you get an increase and then an increase,
Speaker 3: and then an increase, and then suddenly you have very
Speaker 3: severe unemployment, you're very far away from your mandate. The
Speaker 3: risk to the inflation is that, yeah, as Susan and
Speaker 3: others have noted, they've been missing for a long time,
Speaker 3: they're still not back to their target. Even in Susan's
Speaker 3: base case, they don't get back to their target for
Speaker 3: a while, and there are concerns about something more deeper
Speaker 3: becoming embedded. I thought it was very interesting that she
Speaker 3: said that the context that she talked to have been
Speaker 3: surprised by the degree to which they can pass price
Speaker 3: in this environment, and so yeah, very easy to see
Speaker 3: all the different ways that you could derive uncertainty. Now
Speaker 3: to mention the fact that policy itself, the fiscal policy
Speaker 3: through tariffs and so forth, remains uncertain there absolutely.
Speaker 2: I thought it was also really interesting she was talking
Speaker 2: about the idea that the one off tariff price increase
Speaker 2: can take some time to materialize, and she called back
Speaker 2: to the research paper that they're going to be discussing
Speaker 2: at the Boston FED about the twenty eighteen tariffs and
Speaker 2: this idea that even those which we're you know, looking
Speaker 2: back fairly straightforward, took months to actually work their way
Speaker 2: through the economy. Now we're in a place where the tariffs,
Speaker 2: you know, they've been on and then they're off, and
Speaker 2: there's some discussion about what's going to happen. Now, it
Speaker 2: seems likely that you could see that those would take
Speaker 2: even longer to work their way through. I should just
Speaker 2: say we are going to be releasing a special episode
Speaker 2: of the podcast where we talk to a lot of
Speaker 2: the researchers who are presenting at this Boston FED conference,
Speaker 2: So look out for that. And also, if you're interested,
Speaker 2: the Boston Fed will actually be live streaming this conference,
Speaker 2: so you can follow along in real time on Friday
Speaker 2: and Saturday and listen to all the papers actually get toss.
Speaker 3: Yeah, all the PDFs are there, and so that's what
Speaker 3: Tracy and I are going to be doing on Friday
Speaker 3: and Saturday. We're going to be listening to speakers. We're
Speaker 3: going to be reading their PDFs, so you can virtually
Speaker 3: join with us, read all the PDFs yourself, and talk
Speaker 3: about them in the discord with us.
Speaker 2: We should actually outsource some of our work and just
Speaker 2: ask people read this paper and then tell us what
Speaker 2: questions we should ask about it.
Speaker 3: No, no, no, that's what cha GPTs for.
Speaker 2: Yeah, all right, Well, we'll be in a Both of
Speaker 2: us are probably going to be in a Boston bar
Speaker 2: in the next day or so, eating beans and reading
Speaker 2: research papers, So that's what we'll be doing. Shall we
Speaker 2: leave it there for now?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the aud Thoughts podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Joe wi isn't Thal. You can follow me
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