1. Supply improvements have played an important role in helping to support economic activity to date, while bringing inflation down. Key drivers have been increases in labor supply, and sustained growth in output per hour.
   Recent work by Boston Fed researchers illustrates the importance of positive supply developments since the second half of 2022 in the disinflation process.
2. Looking ahead, Collins expects supply factors will continue to play a key role in the economy’s evolution. This includes both the potential for continued productivity gains as well as some economic headwinds from new supply developments, such as reduced population growth and an increase in firms’ input costs from tariffs.
   Collins notes that “It will be difficult to determine the net effect of these supply developments.” However, she expects that the negative supply effects will weigh on the economy this year.
3. Output has remained on a solid, if slower, trajectory … but the outlook for both economic activity and inflation remains clouded by significant uncertainty, as well as competing risks.
   The labor market remains at or near full employment. Inflation – though significantly down from its 2022 peak – is still elevated. And recently announced large and broad-based tariffs could raise inflation at least over this year, while slowing the pace of economic activity.
4. Periods of high uncertainty like we are seeing now can also have negative demand effects, as households and firms become more hesitant to spend.
   Indeed, Collins notes that a “wait-and-see” attitude has become commonplace among stakeholders in her Fed District.
5. Collins sees monetary policy as currently “well positioned to address a wide range of potential economic outcomes in this highly uncertain environment,” with competing risks. She believes that “maintaining the current monetary policy stance seems appropriate for the time being.”
   Given the likely evolution of inflation and real activity and the related risks to both, policy could face challenging tradeoffs. Setting appropriate policy will potentially require balancing competing objectives and will depend on the economy’s actual and expected distance from the FOMC’s full employment and price stability mandates.
6. Collins notes that “…policy should help guard against the risk that price-level increases related to tariffs destabilize inflation expectations.” Further monetary policy normalization will importantly depend on having sufficient confidence that the tariff induced inflation will not persist, and on the stability of longer-run inflation expectations.
   “It may still be appropriate to lower the federal funds rate later this year. But renewed price pressures could delay further policy normalization, as confidence is needed that the tariffs are not destabilizing inflation expectations. With elevated inflation, the signal would have to be compelling to take preemptive actions against the risk that activity weakens by more than expected.”

Susan Collins:

I am absolutely thrilled to be here. I do want to thank Professor Vroman for a kind introduction, and the warm welcome from Chair Ludema and Dean Sobanet and just so many of my former colleagues and still friends who I’ve been able to meet and greet with. And I have to say, I had a tremendous conversation a little earlier with a number of Ph.D. students and you all inspire me. Thank you for your wonderful questions and for the really lively conversation.

As has been mentioned, I do have many memories of the Razin Prize and frankly, it is an event that is quite near and dear to my heart. I do want to especially acknowledge Assaf Razin, a distinguished international economist, who was instrumental for me early in my career, and I know has helped so many people in so many ways and done so much for the profession as well. It’s wonderful to see you and I’m glad you’re here. We honor the memory of his son, Ofair, and, as you know, I did serve as Ofair’s dissertation advisor, and welcome the opportunity to briefly remember him.

My recollection really starts with just the extent to which Ofair demonstrated a really deep-seated belief in the importance of valuing people and that means expecting respect for himself as he pursued his degree amid really significant personal challenges.

That was inspiring and really important, while upholding respect for all of those around him. His intellectual curiosity really combined attention to technical detail and models and econometric analysis, but also with an interest in parsing out what the intuition was behind the results. And I do want to just tell a very quick, brief story.

Ofair was in the first Ph.D. course that I taught here at Georgetown – I think it was 1993. It was International Macro and Finance. And I remember the students as being a bit surprising to me, they were surprisingly reticent, except for Ofair. He was certainly one of the first students to raise their hand in the class. I don't remember which international model I was presenting, but I remember him taking issue with the model's assumptions and it was the first of many very candid, engaged, substantive discussions that I had with Ofair over the years. He was lively and often very insightful in those conversations. He enjoyed asking challenging questions, and he enjoyed being asked them as well. And that's something I always remembered about him. It was really a pleasure to teach and advise him and then to see the core of his dissertation, which was an empirical paper on real exchange rate misalignment and growth, published.

Ofair passed much too early and it's an honor to deliver this lecture in his memory.

I also want to congratulate Tracy Xu on writing and winning the 2025 Razin Prize for the best research paper for an advanced graduate student this year, and congratulations as well to her advisor, Professor Mukoyama. Well, as you've heard, Tracy's paper explores the impacts of restrictions on labor mobility in China and the resulting potential mismatch between labor supply and demand with a range of implications in particular for productivity and output.

My remarks today will focus on a very different economy and a different part of the world, but will also explore the importance and impact of supply-side developments.

I will begin with two important disclaimers. First, I always mention that my remarks are my own and may not reflect the views of my colleagues at the Board of Governors, on the Federal Open Market Committee, or at the Reserve Banks.

Second, I’d like to acknowledge that any discussion of the economy today has to take into account the evolving policy landscape. Here, I’ll refer to Federal Reserve Chair Jay Powell’s comments last Friday, observing that the new administration is in the process of implementing substantial policy changes related to trade, immigration, fiscal policy, and regulation. It is not the Fed’s role, of course, to comment on policies for which we are not responsible. “Rather,” he said, “we make an assessment of their likely effects, observe the behavior of the economy, and we set monetary policy in a way that best achieves our dual-mandate goals” from Congress.

With that in mind, let me turn to the economy. I’d like to start with the big picture: output appears to be still on a solid, if slower, trajectory; and a broad set of indicators suggests that the labor market remains at or near full employment. However, inflation – though substantially down from its 2022 peak – has remained elevated. And recently announced tariffs, which are broad-based and still large, are likely to raise inflation this year, while slowing growth. It is an understatement to say that the outlook for both economic activity and inflation is clouded by significant uncertainty, as well as competing risks – and I will discuss those shortly.

Understanding how the economy has evolved is critical for assessing its likely trajectory. While both the demand side and the supply side have played important roles in the aftermath of the pandemic, in my view, supply-side factors are often underappreciated. And so, in my remarks today, I’d like to highlight key supply-side dimensions – first, their role in how we got to where we are, and then their likely impact going forward, and finally the implications for appropriate monetary policy. Along the way, I’ll refer to several charts to help illustrate some of the key points.

Figure 1 really sets the stage for my discussion. On the left, it shows the evolution of the unemployment rate, which is a good indicator of overall labor market conditions. The right panel shows the Fed’s preferred measure of inflation, calculated using the Personal Consumption Expenditures (PCE) price index. The blue line is 12-month total (or “headline”) inflation; the green line is the Fed’s 2 percent target; and the red line is “core” inflation, which excludes the volatile – though obviously very important – categories of food and energy, and we tend to focus on core because it's a good predictor of inflation going forward.

As the figure highlights, unemployment increased sharply at the onset of the pandemic. But unlike in previous downturns, it also dropped quickly, as the economy reopened. Eventually, the unemployment rate fell below the level that I would consider consistent with price stability. More recently, it’s moved up and – as I noted earlier – now appears to be in line with full employment conditions. Regarding prices, inflation surged in 2021 as demand outstripped supply. But as demand and supply have come into better balance over time, inflation has declined considerably, but is not yet back to the Fed’s 2 percent target.

Positive supply developments were essential to the healthy economic conditions this year. We can see this by looking at real GDP, where trend growth has been notably faster in recent years than it was in the years leading up to the pandemic. The solid line in Figure 2 shows the evolution of real GDP since 2018, including the sharp pandemic drop and the subsequent rebound. It’s interesting to see that at the beginning of 2019, the median FOMC [Federal Open Market Committee] participant expected real GDP growth to average 1.9 percent per year over the long run – that pace is illustrated by the blue, dashed line. However, actual output growth has clearly exceeded that rate.

Since the economy is arguably at full employment now – and was likely near full employment in the years just before the pandemic – GDP is likely close to its potential and was similarly close to its potential in 2018. If so, trend GDP growth over this period was about 2.4 percent, as shown by the red, dashed line. This is half a percentage point faster per year than the pace expected in 2019. Two key factors have contributed to this faster pace: an expansion in labor supply and a pickup in labor productivity growth. And I’d like to turn to these two themes next.

As Figure 3 shows, an expanding labor supply has resulted in appreciably greater payroll employment gains. As with output growth, I’ll assume employment growth is close to trend now and was close to trend right before the pandemic. If so, then from 2018-2024, trend growth averaged about 130,000 jobs per month, as shown by the red, dashed line. This is a significantly faster rate of job creation than the average pace of about 90,000 jobs per month that prevailed from 2007-2018, shown by the dashed, blue line.

While a lot more could be said about the developments behind these labor supply gains, I’ll just mention a few points. First, increased immigration was a very important factor, which helped to offset slower domestic labor supply growth stemming from the aging of the native population and pandemic-induced early retirements. Higher labor force participation, especially among prime aged workers, those aged 25-54, also played a key role. It’s worth noting that this rise in prime-age labor force participation was evident across racial and ethnic groups and was actually especially pronounced among women.

The second factor supporting faster trend growth has been a step-up in labor productivity growth. The solid line in Figure 4 shows one measure of labor productivity: output per hour worked in the nonfinancial corporate sector. Before the pandemic, this measure grew an average of about 1.2 percent per year, which is the blue, dashed line.

In fact, concerns about anemic productivity growth were widespread in the mid-2000s and onward. But as the red, dashed line shows, trend growth in output per hour in the nonfinancial corporate sector appears to have risen notably, possibly above 2 percent, since the end of 2019.

The figure also highlights the large swings in productivity early in the pandemic recovery. The initial productivity surge largely reflects the much greater concentration in output experienced by customer-facing industries, which typically have lower pay and lower productivity. In this respect, the surge mostly captures a temporary shift in the composition of output across industries. As the economy reopened and workers were rehired, these effects waned, but as the chart shows, labor productivity has continued to expand at a fairly strong pace.

At this point, it is not entirely clear which forces are driving these productivity gains – or how persistent they will prove to be. Figure 5 shows two factors that likely played a role. One is the increased pace of new-business formation, shown on the left, has picked up noticeably. This type of business “dynamism” has been connected to innovation and productivity gains. And second, as shown in the right panel of Figure 5, job turnover – as measured by the quits rate from the Job Openings and Labor Turnover Survey (JOLTS) – increased appreciably as we came out of the pandemic. While some of the increase in quits in late 2020 and early 2021 may have resulted from workers leaving the labor force, the sharp rise later in 2021 and in 2022 likely reflects improved employer-employee matching.

Firms have also increased their use of automation and other labor-saving technologies. Initially, this was driven by a need to sustain production amid severe labor shortages. In early conversations I’ve had with contacts around New England, I’ve heard examples of shifts to new business processes and incorporation of more established technologies. But more recently, I have been hearing a lot about experimentation related to AI [artificial intelligence] – and there seems to be increasing optimism about potential production enhancements from these technologies. More firms are moving from researching and testing to actual implementation, and I will have more to say about this in a moment.

One quick note – so far, I have illustrated the supply improvements using linear trends. Of course, I did this for simplicity – there is no reason to assume there needs to be linearity. History has shown that there are periods when productivity growth steps up more quickly – and that could certainly happen again.

The supply improvements, especially those related to productivity, also appear to have supported economic activity through other channels. In particular, they likely contributed – at least before the recent financial market turbulence – to positive market sentiment, reflected in high stock prices and in credit spreads that have been tight by historical standards.

These developments, in turn, resulted in financial conditions that did not exert undue restraint on the economy – despite monetary policy that has been restrictive since 2023. Generally accommodative financial conditions – along with lingering support for households from pandemic-era fiscal policies and firms’ healthy balance sheets – have helped to maintain private spending in the face of higher interest rates. With only modest restraint from monetary policy given these tailwinds, together with the supply side improvements I have mentioned, GDP growth has stayed healthy while inflation declines.

Turning now to inflation developments, disinflation was particularly pronounced in 2023, then slowed somewhat in 2024, which is highlighted in the left panel of Figure 6, which shows the 12-month percentage changes in total and core PCE prices. Recent work at the Boston Fed breaks out the contributions of supply factors from demand factors to inflation and illustrates the importance of supply developments during this period.

The right panel of Figure 6 plots 12-month core PCE inflation as well as the 12-month percent change in the supply-driven component of inflation, as estimated by my staff. The figure shows that during 2022, negative supply effects – such as supply-chain bottlenecks – likely contributed more than 3 percentage points to core PCE inflation at a time when the rate was running above 5 percent. But in 2023, the easing of these bottlenecks and the improvements in productivity, played an important role in inflation decline.

In 2024, the supply-chain constraints had largely waned, and supply and demand were in much better balance. The limited disinflation during this period was likely due to lingering effects of large pandemic-related shocks still working their way gradually through the economy. A key example to mention here has been shelter, or housing price inflation, which tends to adjust slowly to new market rent conditions.

The developments that I have described so far have resulted in an economy that has been at or near full employment. And the stability of the unemployment rate in recent months suggests that the economy has been growing near trend. But inflation has remained somewhat above the Fed’s 2 percent target. In this context, if inflation expectations remain well-anchored, a policy stance that continues to exert some modest restraint on demand should preserve healthy labor market conditions, while ultimately helping to facilitate a return of inflation to target. But as I emphasized at the outset, the announcement of broad-based new tariffs will push up inflation, while slowing growth. Furthermore, high continuing uncertainty – especially about trade and other policy developments – is significantly clouding the outlook.

Looking ahead, I believe that supply factors will continue to play a key role in the evolution of economic activity and inflation. Starting with real activity, I see the potential for both positive and negative supply effects.

On the negative side, one factor that will slow the pace of economic activity is the restraint on supply from slower population growth tied to reduced immigration. Higher tariffs will also act as a negative supply shock, as domestic firms that rely on imported intermediate goods will see an increase in costs. The likely result will be lower output, and reduced hiring and capital expenditures. But it is premature, I would say, to assess any potential offsetting implications from onshoring.

On the positive side, as I mentioned earlier, many companies remain optimistic about the potential productivity gains from automation and increased use of AI-based technologies. While it is too early to quantify the potential benefits of these technologies, some early signs are worth highlighting. For instance, the growing focus on automation is evident from the notable rise in the number of AI-related mentions in publicly listed companies’ earnings calls. The left panel of Figure 7 shows overall references to automation as a share of total words in those earnings calls. The right panel highlights a few industries where mentions are particularly elevated – starting with information, which is the blue line, professional, scientific and technical services, and most recently, retail, which is the red line.

Industries with more frequent mentions of AI investments and adoption also appear to have experienced somewhat higher growth in real output per hour over the 2022–2024 period. This is illustrated in Figure 8, which depicts the correlation between mentions of AI on the horizontal axis and productivity gains on the vertical axis, by industry. The three industries I just mentioned are the three dots at the top right of this chart.

In addition to productivity enhancements, there could be further supply improvements from other developments, such as corporate tax policy and deregulation that raise the supply of capital and potentially lower costs for some firms.

It is challenging to determine the net effect of these supply developments, especially because at this point, we still do not know the details of government policy changes or their impacts. However, while some of the more positive developments could be realized over time, I expect that in the near term, the negative supply effects I have discussed will weigh on the economy.

In addition, demand developments could mirror the timing of these supply-side effects. In particular, financial market support to households and firms should wane in the near term, especially if the recent tightening of financial conditions, as reflected in lower stock prices and wider credit spreads, continues. Furthermore, and importantly, high periods of uncertainty like we are seeing now can also have negative demand effects, as households and firms become more hesitant to spend. Indeed, a “wait-and-see” attitude is now prevalent among stakeholders in my region.

Quantifying this effect is difficult, although it is clear that current levels of economic and trade policy uncertainty, as shown in Figure 9, are very elevated by historical standards. In this chart, the left panel shows a measure of overall policy uncertainty, while the right panel shows a measure focused on trade policy uncertainty, which has reached an all-time high. And while lower taxes for businesses and households could boost demand, this effect is likely to play out over a longer horizon.

Thinking about supply and demand developments together, I see the potential for demand to grow more slowly than supply. This would result in GDP growing below an already slowing trend in 2025, and the unemployment rate rising somewhat. I’ll also note that we should expect reduced GDP growth early this year from the import surge due to front-loaded purchases to get ahead of tariffs, should start unwinding and boost GDP in coming months. Over the medium term, as demand and supply improve, there could be more scope for faster growth. But more adverse scenarios for real activity cannot be ruled out.

Turning back to price developments, core PCE inflation should increase this year, before gradually reverting to the Fed’s 2 percent target over the medium term. I see this high inflation as mostly tied to the expected impact of tariffs, given announced increases that are larger and more broad-based than anticipated.

While we do not know exactly how the tariffs will play out, a scenario with an effective tariff rate somewhat above 10 percent would raise the core PCE price level by a cumulative 0.7 to 1.2 percentage points, or could raise them, with most of the effect likely occurring this year. If correct, this would result in core PCE inflation possibly running well above 3 percent this year. This estimate is based on analysis by my staff which incorporates tariff effects on both directly consumed imported goods, and also on imports used in domestic production. These imported intermediates account for 44 percent of total U.S. imports in final consumption, which are used by a wider range of domestic producers than many people realize. So, that indirect effect is really important to take into account.

There is, of course, considerable uncertainty around these estimates and the administration’s policies are still evolving. The ultimate impact of the tariffs will also depend crucially on the degree to which firms pass increased costs on to consumers – and on the extent to which trading partners retaliate.

Recent inflation data have already been somewhat elevated, despite some moderation that was shown in this morning’s March CPI numbers. Figure 10 highlights some evidence that suggests that recent PCE price increases have been greater in goods categories that are more likely to be impacted by tariffs. This figure shows the change in one-month inflation rates from January to February for different PCE goods and services categories on the y-axis, with the categories ranked by their direct tariff exposure on the x-axis. The figure highlights that inflation increased more in February in those categories with greater direct tariff exposure.

Against this backdrop, I see monetary policy as well-positioned to address a wide range of potential economic outcomes in what is a highly uncertain environment. The current federal funds rate should continue to exert some restraint on the interest-sensitive components of demand, such as residential and business investment. It should also have a stronger effect on some households now that the labor market and households’ balance sheets have normalized. But the 1 percentage point easing of the policy rate near the end of last year should avoid undue restraint, helping to preserve labor market conditions that are still healthy overall.

However, in the near term at least, policy also will have to manage risks to the outlook, which I see as moving further to the upside with respect to inflation, and to the downside with respect to economic activity. In particular, policy should help guard against the risk that price-level increases related to tariffs unmoor longer-term inflation expectations.

One important feature of the pandemic inflation episode was that longer-run inflation expectations remained well anchored, which contrasts with the 1970s experience, as shown in Figure 11. Stable inflation expectations supported the disinflation we’ve seen to date amid healthy labor market conditions. The stability of longer-term inflation expectations will be an important determinant of monetary policy going forward. While most long-run inflation expectations measures remain well behaved, the recent increase in the Michigan Survey measure, the red line, is an exception and bears careful watching.

Maintaining the current monetary policy stance seems appropriate for the time being, as we learn more about the scope of changes in government policy and their impact on the economy. Given the likely evolution of inflation and real activity and the related risks to both, policy could face challenging tradeoffs. Setting appropriate policy will potentially require balancing competing objectives and will depend on the economy’s actual and expected distance from the FOMC’s full employment and price stability mandates. It may still be appropriate to lower the federal funds rate later this year. But renewed price pressures could delay further policy normalization, as confidence is needed that the tariffs are not destabilizing inflation expectations. With elevated inflation, the signal would have to be compelling to take preemptive actions against the risk that activity weakens by more than expected.

I caution here that my outlook could change considerably as events unfold over the coming weeks and months. Monetary policy will need to remain nimble as we continue to focus on achieving both the price stability and the maximum employment dimensions of the Fed’s dual mandate goals from Congress.

With that, let me conclude with a few observations. Being here for the Razin Lecture of course brings back memories of advising Ofair on his dissertation, and more generally of my time on Georgetown’s faculty, from 1992-2007, including work with Fed economists.

The Federal Reserve Board, where I meet with colleagues on the Federal Open Market Committee eight times a year, is not that far from here, but actually being part of the Fed System has expanded my understanding of the central bank’s roles and the breadth of its activities. With the eyes of still a relative newcomer, I have been impressed by the expertise, dedication, nonpartisanship, and the public service orientation of the Fed’s people. They are truly engaged by the opportunity to help Americans benefit from a vibrant economy that works for everyone.

One strength of the Fed’s long-standing structure of 12 Reserve Banks is its on-the-ground presence – not just in Washington, and on Wall Street, but in rural areas, in small as well as large cities, and all across the country. And our senior policymakers are appointed to their roles in different ways, which makes the Fed representative of the country and accountable, while also providing the room to make sometimes hard choices in the long-term public interest.

You’re familiar with the interest-rate decisions we make, and hopefully with some of the extensive economic research that informs them. We augment that research and analysis with active engagement across our regions, listening to all types of stakeholders. That deepens our understanding of economic conditions, to better pursue our mandates from Congress for price stability and maximum employment.

The Fed’s work also includes supervising some of the nation’s banks for safety and soundness, which is crucial to ensuring a stable, secure financial system that all of us can rely on. And our community development activities include research and convening that help illuminate challenges and opportunities for economic resurgence in areas that may be struggling.

The Fed also has a key role in ensuring that the nation’s currency is available to meet public needs. We operate electronic systems that transfer trillions of dollars of transactions every day, safely and securely. And we innovate to increase efficiency – including developing new infrastructure, like the FedNow instant payments system that we built to help make real-time payments available to all banks and all consumers over time.

To wrap up, it's been truly a pleasure to share my perspective on supply factors in the evolving economy and also to say a bit about how the Federal Reserve fits into our country's framework of economic policy.

Thank you again for hosting me. Congratulations again to Tracy Xu, and really to all of you at Georgetown for your impactful work. And thank you for joining me in honoring Ofair Razin today. Thank you again for hosting me today.

Susan Vroman:

I’ll let Susan handle questions. We have 10-15 minutes.

Susan Collins:

Yeah, absolutely. I think there’s a mic?

Audience Member:

I have maybe a dumb question. The Fed’s 2 percent target has been in effect quite a long time, despite some big structural changes. What’s the rationale for that and do you see some structural changes that have actually, would lead the Fed to alter that as the target?

Susan Collins:

The official time when the 2 percent target went into effect was actually related to the 2012 [Monetary Policy] Framework Review and there was more of an informal approach to a target before them. So, you're right, the 2 percent target has been in effect for quite some time and a number of other central banks, of course, have a similar target.

We are in the midst of a new framework review, there was a commitment to do framework reviews every five years. However, as you may know, Chair Powell has announced that the 2 percent target is not one of the things to be reviewed at this time. In the middle of still bringing inflation down to 2 percent from the highs that we saw - it's not the right time to really consider moving a goalpost.

And so, I'm not actually going to comment more broadly, but certainly there has been active debates over time about what is the best target. The other thing I would say is that from my perspective, I think of price stability as being an environment where prices changes are low and stable enough that no one's thinking about inflation. And I think that it has clearly been demonstrated in this country that a 2 percent target over time is very consistent with that type of stability, which to me interacts very well with the longer-term goals as well, including maximum employment. I see our 2 percent target as having served us very well and I'm sure that the discussion and debate about targets will continue and encourage academics to continue doing that work. I think it's valuable, but it's not part of the discussion for the framework review in this round.

Audience Member:

Thank you again for your talk, and I just want to thank you and the Fed for being an example of really competent government and wise people. It gives us a lot of confidence, and we have to really remember that these days, that government for us has been a good thing, the Fed has done a lot to keep our lives safe and secure financially, but let’s go to the other side and you probably won’t be able to say much about this, but, you hear this on the radio, there's a lot of fear in our country, fear and there’s starting to be a sell-of of T-bills and [inaudible]. So, the question is, if there is a huge rise and interest rates, does this Fed have the the ability to counteract that and keep interest rates low and prevent a big crash in our economy?

Susan Collins:

We, of course, are watching a wide range of dimensions of economic activity, and that's certainly includes financial markets. There has been quite a bit of volatility in financial markets recently, as I mentioned briefly in my talk. And that's certainly something that we continue to watch. Financial markets continue to liquid, to be performing very well, and I think that is an important thing to emphasize.

It is true that longer-term rates have increased in part related to a rise in credit spreads. And again, that is certainly one of the things that we factor in as we look at financial conditions and develop an outlook in terms of the likely performance of economic activity, as well as inflation and the economy more broadly.

So, these are all things that we are watching very closely. I totally agree that they're very important. And the Fed does have a range of tools related to financial stability that would be deployed as you did. Thank you.

Audience Member:

Thank you for coming back to Georgetown. As a senior about to enter the workforce, if you spoke about AI and I’m wondering your thoughts on AI and unemployment and like right now. AI is seen as a means of increasing productivity, but do you ever see AI as a means of increasing unemployment as well, and how do you see it between productivity and unemployment?

Susan Collins:

Yeah, thank you for the question. So, I certainly think that new technologies, especially a broad-based general technology, if AI turns out to be that, can have significant effects on a range of dimensions of the economy, certainly including labor markets.

But, you know, if you think back to the significant technological advances over time, there's often been a concern that they would significantly derail employment growth. And what they've actually done is have a significant impact on the composition of jobs and employment.

So, my expectation would be that if AI turns out to be a general usage technology that has significant effects throughout the economy, that it would absolutely have implications for the composition of employment, but not necessarily for the total amount of jobs available and for the growth. Transition effects can be challenging and there can be concentration of some of those impacts in particular places and particular sectors and types of work, and those can last over some time. So, there are many things, and again, from the perspective of being here at the university with many students who are interested in projects and studying things are many things to look at in more detail and to understand better, and so those are very important questions to ask. Thank you.

Audience Member:

I have a question about the Fed’s independence from politicians. This is something that the Fed has done very well in recent years, but the pressure that a lot of politicians are putting on the Fed to start making their decisions regarding interest rates for political reasons and all that, the pressure has ratcheted up, especially as Chair Jerome Powell’s position is ending next year. Do you have any thoughts on what the Fed is doing, its independence, and really anything along those lines?

Susan Collins:

Let me say a couple of things about that. The first one is that I am laser focused on the mandates that we have from Congress and using the range of data and analysis available to make the very best decisions in the public interest, that’s what we're charged to do and that is certainly what we will continue to do, and I think that's important. I would also say that there is considerable research that shows that central banks with independence are able to make decisions that serve their economies well over the longer term and therefore, the value of independence, I think is important.

And I guess the final thing that I would say is that I see an independence is going with accountability and take the accountability piece very seriously as well.

And of course, the Fed is accountable in a number of different ways. I mention that briefly in my remarks, but it's, I think, very important to pair those two together.

Audience Member:

Thank you for the talk. A recent report from Moody’s highlighted 50 percent of U.S. consumption today is concentrated with the top 10 percent of earners, and forecasts from from J.P. Morgan and Goldman Sachs are slowly ramping up forecasts for recession. How do you think that this discrepancies, highly unequal amount of exposure the economy has to a small group of people are driving a lot of the consumption we are seeing, how vulnerable is the U.S. economy to that as we enter a period of greater and greater recessionary fears?

Susan Collins:

A couple of parts to that, so I'll unpack it a little bit. Let me start by saying that my modal outlook is one of slower growth, but not a more significant downturn, but as I mentioned in my remarks, you can't rule out the possibility of a more adverse scenario, but that that is not my modal outlook.

I do think that it is extremely valuable and important to understand more broadly what's happening underneath the aggregate statistics, and I’m well aware of the point that you make. First of all, you know consumption growth is the main driver of demand, and that, we have seen an increase in the concentration of consumption growth among higher households, and so that is certainly something that we're watching. It's still been strong, one of the questions is how it will evolve over time.

Looking at that distribution is one of the many things that we explore both through the data that we look at, but also through discussions we have with a range of different kinds of stakeholders and advisory groups throughout our economy. It's not clear yet, I think, the extent to which things will extend.

But, what I will say is that while some of the very strong household balance sheets after the pandemic with many of the fiscal supports during that period have waned, as I mentioned, many of the measures that we track related to resiliency of households, certain kinds of bankruptcy rates, some of them are elevated, but some of them are not. And so, there are a range of different types of indicators that we're following and we're trying to keep our hands on that more broadly as we develop our outlook.

Audience Member:

Following up on the question that was just asked and answered, there's been some evidence of inflation inequality, different income groups experience [inaudible]. So, when policymakers like yourselves are talking about price stability or how to address inflation, are you concerned about how, the inflation rates that different groups are experiencing, or just inflation?

Susan Collins:

I'm absolutely concerned about the ways economic conditions impact people, and as I mentioned earlier, the aggregate numbers that we look at do mask considerable differences by groups of people, by place, across a number of dimensions. You know, it's certainly true that monetary policy, our mandates from Congress for price stability and maximum employment, is for the country overall.

I strongly believe that deepening our understanding of what's happening underneath those aggregate statistics better informs our understanding of economic conditions and how they're likely to evolve.

And I would also say that the Federal Reserve Banks have a broader mission, our overarching mission at the Boston Fed is a vibrant economy that works for everybody, not just for some people.

And I mentioned at the end of my remarks, some of the other activities, responsibilities, things that we do as part of our portfolio. And as part of that broader portfolio, understanding where there are challenges, where there barriers to participate in the economy, which, of course, reduces the ability to reach the full vibrancy that can benefit all of us, and so our community development function and some of our research projects do look underneath the aggregates.

I will say specifically in terms of inflation, it has been extremely clear that there are important reasons to bring inflation back down to price stability and to keep it there over time.

Inflation has taken a significant toll on people and that toll has tended to be higher on lower and moderate income individuals, communities, often smaller firms in some cases, and so the importance for the work we do in the public interest of understanding that, I think is also certainly top of mind for me as I think about the responsibility, as well as the privilege, of the role that I play. Thank you for that question. My friend Assaf had his hand up and I would love to hear your questions.

Audience Member:

On the supply side issue that you have articulated about, most of the trade is trade in intermediate groups, rather than [inaudible] goods, and global supply side issues in the world economy. So, and there was never an experience in such a tariff policy that we don’t know the rates and all of that, so, I would ask whether the Boston Fed is researching some of the possible effects which might cloud a bit your optimistic view of the labor market and the economy?

Susan Collins:

Thank you for that question as well, and you're absolutely right that a significant portion of our imports are intermediates, and it's not just concentrated in a couple of different industries, it's quite broad-based and I would expect that that is a very important dimension of understanding what the implications of high broad-based tariffs are likely to be.

We do have staff at the Boston Fed who are doing research – in particular I’ll mentioned a team that's doing research to try to understand the likely effects under different sets of assumptions on inflation, whether it's core PCE or total PCE, and that explicitly was designed to take into account the intermediate interactions as well as the final goods interactions and to be able to parse out the role of that while also looking at the possible differences in how much is passed through, what kind of profit margin assumptions are reasonable to make, and that's where the range came from. So, we absolutely have staff and we’re very interested in that question. At the moment, some are focusing on the inflation side, but there's certainly interest on the real side in that as well and I know that there's also work in other parts of the Federal Reserve and a number of other institutions as well. It's an important question. Thank you.

Audience Member:

[Inaudible question.]

Susan Collins:

About inflation expectations?

Audience Member:

[Inaudible question.]

Susan Collins:

I see inflation expectations as you as really being essential to how to think about a central bank's role in a short-run, medium-run, and the long-run – absolutely. It's not surprising in current environments, large, broad-based tariffs that increase a price level, that's going to cause some short-term inflation questions about how long it persists, how long it takes to get there. So, having short-term inflation expectations increase in that context is not surprising, but really watching whether the longer run inflation expectations remain anchored, I think is very important in terms of how I think of appropriate policy responses going forward.

I think that the credibility that central banks earn over time is critical to the ability to maintain price stability or reduce inflation when it surges with less adverse impact on the real side of the economy.

I think it's very important asset for a central bank to have built up and it's important to preserve it. It's very much top of mind for me as I think about appropriate policy going forward.

I mean, of course, I look at a range of different indicators and considerations, but that is very high on the list.

And thank you very much for all of the questions, and for joining, for being here.