NAIOP Massachusetts: Perspectives on the U.S. Economy with Susan M. Collins

Thank you. It's just really a pleasure to be here with all of you this morning. And I have just wanted to start with a couple of thank yous. So, first of all, Tamara, thank you so much for such a gracious, warm introduction, but also for the invitation to join this important group this morning. I also wanted to thank Kim Sherman Sandler. And, as you know, of course, she's president of Related Fields and thanking her for being part of the program. But in particular, I wanted to thank her for her role on our board of directors, providing us with just really terrific insights over a number of years about the industry, financial conditions. It's been really valuable. And so, Kim, thank you for your public service. And I'd also like to welcome all of you here to the Boston Fed today, interacting with a wide range of stakeholders in our economy is extremely valuable for me and also members of my team, as I think about policymaking and the other broad range of things that we do here at the Boston Fed. So I make sure to meet and listen to participants in the economy from all industries and backgrounds across all of the states of New England, which is our district. And so it's just really wonderful to meet with so many leaders in commercial real estate at the session today. So since many of you are involved in development, I thought I'd briefly mention that we here at the Boston Fed consider this place an example of the civic role of buildings and of development vision. And it's really one way that our organization has been able to help contribute to Boston's vibrancy. So by all accounts and many of you I know know this much more deeply than I may, but the late 60s and early 70s hadn't really been that kind to this part of our city. And so when the fed outgrew its location on Pearl Street and built on this site, it helped to extend expand the city's financial district. And today, this tower that we're in hosts a number of tenant firms, as well as the Boston Fed. And over time, this area has been enhanced with many buildings and development projects. And I just want to highlight the restoration of Dewey Square, the creation of the Greenway, and of course, the remarkable growth just east of us of the seaport. So we here at the Boston Fed are working on a variety of functions and all of them support the foundations of our economy and our financial system. And that is in the service of our overarching public mission, which is a vibrant economy that works for everybody, not just for some people. And along with that, we have a much broader portfolio than many people realize. It includes, of course, monetary policy. And I'll say quite a bit more about that today, a range of economic research, bank supervision, payments, financials, infrastructure services and community economic development. And so it's really quite a broad portfolio. Today. My comments will focus on the economy and monetary policy as we begin this new year. And so I want to start out by saying our economy is in a good place overall. However, economic uncertainty is high and additional information about developments and inflation in the labor market, about possible fiscal and trade policy changes and many more things will be key to determining the appropriate course for monetary policy in the year ahead. In my remarks today, I'd like to do four things. I'm going to start by describing just what I mean by saying the economy is in a good place overall, and that'll refer both to current conditions and also to my outlook. And that'll lead me to a brief discussion of the elevated uncertainty I've already mentioned and implications for monetary policy. And then I want to end by offering a few reflections as I look back on 2024 that are influencing how I'm thinking about the year ahead. And then I look forward to taking questions and in a conversation with Kim, and I know that a number of people in the audience helped to contribute to that list of questions. So thank you for that as well. But before I launch in my standard disclaimer, these are my own perspectives, and they do not necessarily reflect the views of my colleagues at the Board of Governors or at other reserve Banks. So my views about the economy are based on a wide range of information, and that includes assessments of a broad array of quantitative indicators that my team and I monitor statistical analyzes, and also what I learn from those engagements with stakeholders across the Boston Fed's first district, which is most of New England. There's some mixed signals and all of that information and the data continue to be noisy. And I'll say more about that in a moment. But still, key dimensions of the economic picture seem reasonably clear to me. And that in particular includes, with respect to progress towards price stability and maximum employment, which are the two parts of the dual mandate the fed has from Congress. The fed defines price stability as 2% inflation. But, you know, I like to think about it more as a low and stable level of inflation such that people aren't really thinking about inflation as they go about their activities. Well, clearly that is not a context that has prevailed since inflation surged in the aftermath of the pandemic. And we have all seen just how difficult that is and has been for households, for firms, in a variety of different ways. Maximum employment, the other leg of the Fed's dual mandate, that's a less precise definition, but can be thought of as an economic environment that offers job opportunities for all of those who would like to work. So as we enter 2025, inflation is down significantly from its 2022 peak and the data point to a gradual, if uneven, bumpy path back to the Fed's 2% inflation target. And importantly, this progress that we've made so far has been accomplished with a labor market that stayed healthy overall. As the unsustainably hot job market conditions from two years ago cooled and cooled in an orderly way, demand and supply for workers is now in much better balance, and the unemployment rate has remained low by historical standards amid solid economic growth. And that's all good news. And it's really central to what I mean when I say that the economy is in a good place. I'd like to briefly note three sets of factors that have contributed to those positive outcomes so far. The first are developments that relate to the supply side of the economy. Economic growth that's demand driven tends to be inflationary. You know, the strong demand tends to put pressure on prices and raise inflation. And in contrast, the combination of strong growth with limited signs of new price pressures points to supply improvements, playing a really important role. And in that dimension, there are a number of different types of supply improvements. We've seen supply chain normalization has been particularly important. And that was particularly true back in 2022. We've also seen growth in labor supply and in productivity. The labor supply expansion has come both from significant increases in immigration and also from a larger than expected rise in the prime age labor force participation rates. And if you look at the data, in fact, that rise has been evident across gender and racial and ethnic groups. And those supply improvements were particularly welcome given how tight labor markets were, as we came out of the pandemic. But last but not least, I want to highlight labor productivity or output per hour worked. That's been growing notably faster than it did pre-pandemic. So to be clear, there are many possible explanations for this rise in trend growth of productivity, and it's not clear how long it will persist. But the improvements to date have had favorable implications supporting economic growth and the disinflation process, and is certainly one of the things that we're quite interested in and that I've heard about from business owners, large, medium and small, in my conversations around the district. A second factor has been restrictive monetary policy actually doing its job and helping to rebalance demand and supply by restraining the interest sensitive components of demand and thus reducing the pressures on wages and prices. The large, rapid increases in the Fed's policy rate in the second half of 2022, followed by more gradual hikes and then holding rates at 5.5% for over a year, underscored the Fed's commitment to restoring price stability, and it helped to keep long term inflation expectations from rising. And expectations, of course, are really important in influencing people's behavior, which then feeds through into the demand and other dimensions of how the economy's dynamics unfold. And the fact that inflation expectations have remained well anchored reflects the Fed's earned credibility. And again, is something that I will continue to watch closely. The third point, which is related, is that both household and firm balance sheets were unusually strong coming out of the pandemic, and that supported economic growth even in the face of higher interest rates. While balance sheets remain in good shape, some of the buffers have waned over time as many households have depleted their excess savings and as corporate cash balances have reverted to pre-pandemic trends. This normalization was accompanied by a slowdown in labor demand. A cooling labor market was an important reason for beginning to reduce the degree of policy restrictiveness in September, and this policy decision was reinforced by concerns about possible emerging fragilities as slowing and more concentrated payroll growth, as well as declining quit and job finding rates appeared in the data, and the increased risk of more pronounced and unwanted weakening of labor market conditions. And with inflation heading back to target, a key goal for policy became preserving those healthy labor market conditions while continuing to bring inflation down and I continue to monitor a range of indicators, including labor market indicators, closely. But my concerns about emerging labor market fragilities have decreased more recently as the unemployment rate stabilized after rising notably in the first half of 2024. So I've described what I mean and some of the reasons for the economy being in a good place overall. But to be really clear, by describing the economy as in that good place, I am not declaring victory. In particular, while inflation is down significantly, it's still above target. Its decline has been slower and bumpier than I anticipated, and there's considerable uncertainty accompanying my baseline outlook. So it will be essential to remain data dependent going forward with a clear commitment to restoring price stability over time while being mindful of sustaining healthy labor market conditions. And tracking inflation, I find it helpful to focus on core inflation instead of total inflation, although the core inflation indicator omits the obviously vital although volatile components of food and energy, the core measure is generally a better gauge of the underlying inflation trends. On a 12 month basis, core PCE inflation was 2.8% in October and November, and while this partly reflects high monthly readings in the first quarter of 2024, it's only a marginal improvement from the about 3% rate that was registered at the end of 2023. So some insight into the recent disinflation process is provided by taking that core inflation and dividing it into its three components. Because those components actually have behaved quite differently. Core goods inflation had declined back to its pre-pandemic range by the end of 2023, as supply chain disruptions normalized. Non housing services, which is a large and very varied category where inflation has been highly volatile, including that big, unexpected bump at the beginning of 2024. But recently monthly inflation readings for this component, the services excluding housing, have also returned to their pre-pandemic range. And that's something that I'll be watching quite closely to see if it's sustained. Much of the continued elevation in inflation comes from the third component, which is housing services, and that seemed stuck at the end of 2023 and well into 2024. And this is likely reflected long lags for the rents charged to existing tenants to catch up to the significantly higher rent levels that have often been associated with new leases. Well, here, too, the data are actually promising. If new market rent growth remains subdued. As it has been now for a number of months. Shelter price inflation should eventually normalize, but it's hard to predict when or how quickly this will happen. Importantly, current labor market conditions also appear unlikely to be a source of new price pressures, even though wages continue to grow more rapidly than their pre-pandemic trend. Analysis by Boston Fed staff show that labor remains relatively inexpensive overall, given the recent productivity gains, which I mentioned, and also, past pace developments. So there's likely some room for additional wage gains that would help to raise the purchasing power and economic well-being of workers without fueling inflation. Although the rate of price increases has moderated notably since 2022, I certainly and I'm sure all of you have stories as well continue to hear during my visits across New England about how high price levels have eroded purchasing power, in particular creating challenges for lower income households. And that is certainly a concern. And, you know, is one of the reasons for my continued commitment to restoring and sustaining price stability. In fact, history has shown that periods of sustained price stability can create conditions where the benefits of economic prosperity are shared out more broadly. And to me, this is another reminder that not just restoring, but maintaining price stability is an essential part of the Fed's mission to serve the public. So I'll turn to policy and my outlook after I say a bit more about the elevated uncertainty. A speech that I gave at Wellesley College in the fall of 2023 focused on monetary policy amid uncertainty and drawing on what is a large literature on this topic. That summarized, for example, in a very influential speech that then-Governor, Fed Governor Ben Bernanke gave in 2004, my remarks emphasize two points. First, there are multiple types of uncertainty. At the time that I gave that speech, all of them were elevated. And in fact, uncertainty remains elevated today. One type of uncertainty relates to data and measurement of key economic variables. For instance, monthly inflation indicators such as the PCE that I mentioned, but also the CPI continue to exhibit more than the usual degree of volatility. And it's also a wide range of views about current levels of economic fundamentals, things like the potential or trend growth rate of the economy and also the neutral rate of interest. A second type of uncertainty is about relationships between key economic variables that influence policy decisions. For instance, as I've noted, the fed increased rates rapidly starting in 2022 and has maintained a restrictive policy stance for a considerable amount of time. But the high interest rates appear to have had a smaller and more delayed impact on demand than would have been suggested by historical estimates. The third type of uncertainty relates to unforeseen future events, including pandemics, natural disasters, future policy changes and geopolitical developments. And here I'll just note the sizable recent rise in indicators of U.S. trade policy uncertainty. So that was the first thing. The different types of uncertainty and the extent to which they are elevated. The second thing that I talked about was that the heightened uncertainty about current economic conditions and benchmarks, and about the economy's response to policy changes that typically calls for a cautious, gradual approach to monetary policy decision making, the need for a more aggressive set of policy adjustments typically arises when policymakers see imminent risks to the achievement of their objectives, but within an economy that's in a good place overall and policy already closer to a more neutral stance, I view the current nature of uncertainty as calling for a gradual and patient approach. So amid this uncertainty, the Federal Open Market Committee, or FOMC, began normalizing policy in late 2024, beginning with a 50 basis point cut in September. And I saw this move as appropriate, given the significant, if bumpy, progress on inflation. The adjustment recognized that there was no need for further cooling of the no longer overheated labor market, that a given nominal policy rate would become increasingly restrictive as inflation came down, and that as the pace of growth moderates, the economy can be more vulnerable to adverse shocks. I also supported the smaller additional rate cuts in November and December, though for me the most recent one was a closer call. On balance, the December cut provided some additional insurance to preserve the healthy labor market conditions, while maintaining a restrictive policy stance that is still needed to sustainably restore price stability. Looking ahead, my current outlook is broadly in line with the median forecast in the December Summary of Economic projections, or SEP. In particular, I expect inflation in 2025 to run somewhat higher than I previously thought, with the risks likely having shifted to the upside. And as I've discussed, while inflation is notably closer to the 2% target, it's proved stickier than anticipated. However, it's too early to tell how future policy changes by the new administration and Congress might influence the trajectories of inflation and economic activity separately. I'll note that it'll take some time for the effects of our monetary actions and policy actions already to filter through the economy, and that's often referred to as the long and variable lags of monetary policy. And while the labor market remains healthy, I will continue to watch for possible fragilities remaining attentive to both sides of our dual mandate and recognizing risks to both inflation and employment. Again, this context calls for a patient approach to policy, taking the time to fully assess available information and not overreacting to individual data readings. As we calibrate policy meeting by meeting, and as in the median SEP projection, this likely implies a more gradual approach to policy normalization, but there is no preset path, and a projection just is not a promise. And my view policy is well positioned to adjust as required to evolving conditions. Holding means holding the current level longer if there's little further progress on inflation or easing sooner if the need were to arise. So as I reflect on economic developments from the past year and more generally, from the two and a half years that I have served as Boston Fed president, three things have stood out that are influencing my thinking about the year ahead. And while I've mentioned each of them in my remarks today, I'd like to pull those lessons together. And then wrap up by connecting them to policy. The first lesson is really just don't forget about the supply side of the economy. Supply factors played a critical role in economic developments and have done so since 2020. Arguably, the severity and persistence of supply chain disruptions were underappreciated as inflation surged and as noted above, favorable productivity and labor supply developments have been key to the progress that we have made both to disinflation amid strong economic growth and also to solid wage growth that's increasing purchasing power without fueling price pressures. You know, in hindsight, some of these linkages may seem evident, but they were not fully appreciated. Of course, we can't count on such favorable supply developments persisting, but either way, the supply side of the economy will continue to warrant very careful attention. Second, recognize that unusual features of the economy are persisting post-pandemic. My remarks highlighted two examples. One is the longer than expected cushion from strong household balance sheets in the aftermath of the pandemic. This has contributed to resilient household spending and potentially lengthened the time for higher rates to work their way through the economy. A second is a longer than expected catch up process of existing rents to new market rents, and the associated difficulties in predicting the evolution of shelter inflation in the post-pandemic housing market. And third, focus on distinguishing potential new price pressures from the dynamics of past shocks. This point connects closely with the second point, in particular, my confidence that shelter inflation is on a downward, if slow and bumpy trajectory relates directly to the evidence that new market rent growth has stabilized at its pre-pandemic level. And provided that this pattern continues, there's much less reason for concern about the longer than expected catch up period to narrow that gap between rent levels on existing and new leases. Similarly, the likelihood that recent solid wage growth will generate new price pressures must be assessed in the broader context of productivity developments and inflation and past inflation. And there's little evidence of this so far, and I will be looking carefully to see if new price pressures emerge in the months ahead. Importantly, as I've noted, uncertainty remains elevated and this includes that volatile or noisy monthly data uncertainty related to unusual features of the post-pandemic economy, such as those I've just noted, uncertainty about possible future fiscal trade and other policies, and uncertainty about fundamentals such as the neutral rate of interest. With noisy data providing mixed signals and focusing only on a few indicators can point a misleading picture. And so it's essential to assess a broad range of information over time to gain a clearer picture of current economic conditions and, importantly, their likely evolution. Furthermore, as I've emphasized in this context, with the economy in a good place overall but significant risks and uncertainties, the appropriate policy strategy is gradualism, anchored by holistic assessment of the data, careful analysis and patience. So with that, I'll say again thank you to NAIOP, to Tamara Small and to all of you for being here today. Very best wishes for the year ahead. And now I look forward to sitting down with Kim and having a conversation and taking some of your questions. Thank you very much.

So, you know, it's actually a question that I get asked a lot. So what is it like to be around the FOMC table? And as somebody who had for a lot of her career focused on monetary policy as part of my economic research, it is different to actually be in that room, but maybe the place to start is just that, you know, the work that we do as part of the FOMC, like, monetary policy is really important for people, for our communities, for our economy. It impacts all of us. And so, the importance of that work is really part of the center and reflected in the extensive preparation. And again, I speak for myself, but of course, all of my colleagues undertake as well working with our team. So let me just say a little bit about what, you know, what I do and what that's like, and so, you know, first of all, trying to, to the best of our ability, understand the dynamics of an evolving economy, focusing on the parts of that congressional mandate, inflation and maximum employment. We look carefully at a lot of the data, and analysis. But I really do want to emphasize that I learn a lot from the conversations that I have around the district. You know, the data on Friday, tomorrow we're going to get the new jobs report and that's going to tell us about December. Right? So the data is actually giving us information about what happened in the past. Talking to people helps to round that out in a variety of ways, including how they're thinking about current conditions and what they're thinking about going forward. And so we gather all of that data to try to have a clear sense of how, you know, things are evolving. And when they're 19 members of the FOMC, there are seven governors in Washington at the board of governors, including Chair Powell. And then there are 12 reserve Bank presidents, of which, of course, I'm one. And so we've all come in with that preparation. And what happens at the actual meeting is a, you know, initially a set of extensive briefings from the staff, and discussions around that in terms of what others are seeing and sharing perspectives and information that's robust. People listen carefully to each other and often do have different views and questions. And then we do an economics go round where each of us shares our perspectives on the economy. And I do a number of things and that it evolves depending on the context. But I always do share information about the first district, monetary policies, National. So I do think that those aggregate numbers can mask a lot of variation and it's helpful to hear the range of context across the region. So we do you know that, and then the second day, there's a second go round that focuses on our policy views. And again, there's a range and they're quite robust. And then, once the decision is made and is voted on, there's a statement and then a press conference, typically on the Wednesday about three weeks later. Then, the minutes from the meeting are made public and the minutes from the December meeting were made public yesterday, actually, and then five years later, the transcript of the whole thing is made public. And so fed watchers actually have quite a bit of information that they're able to review. So just a sense, it's very focused, really substantive. Period, with a range of different perspectives and views that are expressed.

So that one's really hard. Because if I think of there being almost a constellation of data and it's you're trying to get that bigger picture with pieces of information, you don't have a photograph and it's evolving. And so it's hard to pick out 1 or 2 things that I looked at. But it may be, but it does evolve over time. Right? So a couple of years ago, I was much more focused on things like how those supply constraints were evolving. I still look at that, but I'm not spending as much attention because the one normalized, some of the things that I am looking at now, and it's four sets of things and individual ones on the inflation front, as I mentioned, looking at longer term expectations really matters. That would be a concerning signal if they really started to drift up and see whether those new price pressures emerge is important as well. So there are lots of different inflation indicators, in particular the parts that have been sticky. Are we continuing to see the promising news we saw in November? And then on the labor market side, is there evidence of new pressures as well, or evidence of emerging fragilities there are a lot of unemployment indicators. We tend to focus on the unemployment rate, new claims for unemployed. How long does it take people to find jobs? And then the other thing I will flag is, as the new administration comes on board, there's a lot to there will be a lot to focus on in terms of how policy might evolve. And we'll get quite a bit more information about that. That will be very important as well.

Yeah, there's a lot to say there. The conversations that I've had have been very substantive and varied. As I have to say, it's one of the favorite things that I do in my job, being able to engage with people participating actively in the economy. From my perspective, having that be a two way conversation is important. I learn a lot from understanding how people who are participating on the ground in a particular area, what they're seeing, what they're thinking. But I also see it as an opportunity to talk a bit about the Federal Reserve, what we do, people may not agree with some of that, but I think that it's important to have those conversations and to be open and willing to explain. So there are a number of different things that I've heard. So first of all, there's a lot of optimism in New England. The vibrancy, the innovation is inspiring. And there's so many examples of projects that I've learned about and initiatives that are underway. You know, each of the regions of our economy is a bit of a different industrial mix. And so there are variations, there are differences, areas of health care, biotech, education, innovation. There are lots of things that are here. But I also hear a lot about the challenges. And so, every meeting that I go to, I hear about housing challenges. And I suspect we may talk a little bit more about housing. So, but also transportation, childcare, some of those things are barriers for people to be able to participate in our economy. And they really matter. They're very much economic issues. And so learning more both about how those challenges are unfolding and some of the initiatives and things that people are doing, often collaboratively to try to improve the context, just to put things that I will say, very early on, I started hearing about the extent to which the housing challenges were actually a constraint to hiring, which was a, you know, it's not just affordability, which is also very important, but availability across the income distribution, white collar folks, as it just for a variety of different reasons and that broader context, which is a national one, longstanding. And again, I suspect we'll come back to it. But that element of linking it more closely to labor markets. And then I also heard very early on about all that many businesses were doing to enhance productivity, in part because it was so hard to hire and that they needed to find ways to really effectively deploy the labor that they had. And so those things had me, you know, influence the data that I looked at some of the analysis that we're doing. So I see it as a kind of complementary type of thing. And the information that I've heard certainly is part of what I share at the FOMC table and what my colleagues share about their districts as well.