Inflation is expected to continue to decline this year — albeit unevenly — toward the Federal Reserve’s 2% mandate, leading to the possibility of interest rate cuts later this year, said Susan M. Collins, president and CEO of Federal Reserve Bank of Boston and a member of the Federal Open Market Committee.
In remarks to the Economic Club of New York on April 11, Collins said that as inflation gradually eases, demand and supply will likely become “more closely aligned” amid a healthy labor market.
However, describing herself as a “realistic optimist,” Collins cautioned that certain risks and uncertainties remain elevated.
“Recent data suggest it may take more time than I had previously thought to gain greater confidence in inflation’s downward trajectory, before beginning to ease policy,” she stated. “A patient, methodical and holistic approach is required.”
Among the risks, she cited, were the possibility of easing monetary policy too quickly, thereby interrupting inflation’s return to the 2% target; and, on the other hand, the risk of staying restrictive on rates for too long, potentially causing a longer-than-necessary economic slowdown.
Collins noted that one of the “striking features” of 2023 was that while inflation declined significantly, as many expected, the economy “expanded robustly.”
Indeed, in the fourth quarter of 2023, GDP grew by 3.4% on a year-over-year basis (stronger than expected), while CPI dropped to 3.4% in December 2023 from 6.5% a year earlier.
“In addition to increased supply, demand has remained robust — despite higher interest rates,” she added. “Without ongoing supply improvements, we risk demand continuing to outpace supply and exacerbating pressure on prices. This implies that demand will need to moderate for the Fed to achieve its price-stability goal.”
Indeed, Collins cited that payroll growth over the first quarter of 2024 averaged 276,000 jobs per month, while core inflation “has moved up relative to the low readings in the second half of last year.” The implications of these recent data for the evolution of inflation remain to be seen, she added.
Collins also pointed out that given the lag phenomenon, the full impact of Fed monetary policy decisions will take time to fully assess.
“We may not yet have seen the full effects of the FOMC’s past policy actions, given the considerable uncertainty about the lags with which monetary policy affects the economy” she said. “Furthermore, higher interest rates could make the economy more vulnerable to the effects of adverse economic or geopolitical shocks, should they occur.”
In order to gain greater confidence that progress on inflation remains on track, Collins said she will “continue to monitor a wide range of quantitative and qualitative data.”
In a post-speech discussion, Abby Cohen, professor of business at Columbia Business School and former senior investment strategist at Goldman Sachs, brought up the fact that March 2024 annualized CPI came in at 3.5%, higher than expected. In response, Collins repeated that policymakers do not look at just one data point, but rather follow a more patient and methodical approach in order to holistically assess available information.
“Incoming data have eased my concerns about an imminent need to reassess the stance of monetary policy,” she added. “It may just take more time than previously thought for activity to moderate, and to see further progress in inflation returning durably to our target.”