What Susan Collins Wants to See Before Supporting Another Rate Cut

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1:41Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, we're in Boston. I know. We've never done an Odd Lots thing in Boston of any sort, have we? No. This is actually my first time in Boston. I've been to the airport a few times, but I've never actually stayed in the city. and everything I know about Boston comes from the Boston-New York rivalry as depicted in 30 Rock. So I know nothing, basically. You know, when I lived in Vermont for several years in high school, Boston, that was the big city. And people aspired to go to Boston. I knew a lot of people went to college here and stuff like that.

2:18I love it here. I'm excited to be here. You know, the big city closest to my house in Connecticut is Worcester, Massachusetts. That's the big one. That's a nice city too. It's about 40 minutes away. All right. Well, the reason we are here is for the Boston Fed, which is holding their 69th economic conference. And the theme of this year's is the U.S. economy in a changing global landscape, which is putting it mildly, I think. It is putting it mildly. There's a lot going on globally, all kinds of things. You could just run down the list. We don't even have to summarize it, but it is a time of change, both macro, big picture globally, but also just for the near term direction of monetary policy right now in the United States, probably as ambiguous as it's been in a while.

3:00Yeah, I think so. And we're seeing that reflected in a lot of the Fed speak that's been coming out at the moment. We have doves on the one side who are talking about a deteriorating labor market. And then we have hawks on the other side who are still very concerned that basically after five years of inflation, we have still not returned to the 2 % target. It's been half a decade. Right. And as of right now, recording this November 19th, 2025, the warp function looking at Fed fund futures gives about a 45 percent chance of a rate cut in December. That was in the high 60s just a couple of weeks ago.

3:34So a lot of things, a lot of uncertainty, more or less a coin flip right now. We don't know what's going on in the medium term or the long term. I'm going to say one more thing before we get to our very esteemed guest. But there is another complication, which is we've had the government shutdown, right? So we haven't had a lot of the economic data. By the time this episode comes out, there might have been some of the economic data. But we also have Fed minutes that are due out later today. But to emphasize, as of this morning, everything is very, very uncertain. The fog. That's like the term everyone's using.

4:09Yeah, there's a little bit of fog out in the Boston Harbor right now as well. So fog, fog everywhere. OK, so without further ado, we have the perfect guest to talk about the changing U.S. economic landscape and what it means for monetary policy. We're going to be speaking with Boston Fed President Susan Collins. So, Susan, thank you so much for coming on All Thoughts. I am delighted to be here and welcome to Boston. Thank you so much. I heard I'm supposed to eat beans and lobster. Is that right? All right. I'll do that later. Okay, perfect. So tell us firstly about this research conference. What's the purpose of the Fed gathering people together to talk about, you know, you have a series of papers here all with different themes and topics.

4:51Why do this? Sure. Happy to talk about our conference. And I have to say, I and our entire team are delighted that you are both going to be joining us for our day and a half conference. We can't say no to a conference full of academic economic papers. Lots of PDFs to read. Well, it will be quite meaty and informative. You know, it's not just academics. And that's one of the things that I think is really important to us and one of the things that makes it particularly valuable. So we bring together and this is the 69th Boston Conference. It's our flagship. You know, we do other meetings and conferences and other things, but this one is our flagship.

5:30And we bring together academics, certainly. We bring together policymakers from different institutions. We bring together business leaders. We have a wide range of people. We actually have people from different disciplines. So one of the papers is from a political scientist as well. So that is kind of a hallmark of the conference, is to really do a deep dive to understand dimensions of a topic. And we picked a pretty big one this time, so I'm not going to suggest We're going to cover the entire thing. But understanding the U.S. economy in what is a changing global landscape related to risks and uncertainties, to fragmentation, it's a lot to talk about.

6:08And I'm really looking forward to being part of it, to learning and to hearing the presentations. I don't want to create any tension between you and the fellow regional Fed presidents, but doesn't it feel like Kansas City cheats a little bit by having their conference in Wyoming in August, et cetera? And we're in Boston in November. Which is great. And it's lovely here. And it's lovely. What's wrong with Boston in November? I always feel like it's kind of cheating. That's like, oh, we're not even going to have it in the exact location. And we're going to have it in the middle of summer in this beautiful location.

6:43It is kind of cheating. Well, you know, the Jackson Hole Conference is a very special one. I have been participating in that for a long time and I am a huge proponent. And I just say the more the merrier. It's a lot to talk about. A positive abundance mindset for conferences. That's right. That's right. So let's talk. Actually, you know, we'll get into we want to talk about some of the big themes. We want to talk. Let's talk a little bit of near term monetary policy, etc. Odds of a December cut have come in dramatically because you and some of the other members of the FOMC have been talking about this concern that inflation remains stubbornly over target.

7:23That being said, there does seem to be a lot of evidence of labor market weakening, right? And we haven't got the unemployment rate for a while, but basically every measure seems to show a significant, I don't know, stall, et cetera. Talk to us about your read on the labor market right now. Are you concerned that some of the weakness that we've seen could snowball into seriously deteriorating environment and a sharp increase in the unemployment rate? Yeah. So I appreciate your framing of that. I have to start by saying I'm really focused on both parts of our mandate. And that does mean the labor market, say more about that in just a hot second, but also concerns about the elevated inflation and what I hear about that and our commitment to price stability.

8:09So, you know, they both really matter. And I'm looking at both of them. That's really what I've been emphasizing. As far as the labor market, you know, it's kind of an unusual situation in some ways, right? I mean, what I think is pretty clear is that we have seen softening in the labor market. We are pulling together all the data that we can find. But as you pointed out earlier, we don't have the official data yet. We'll get a jobs report from September tomorrow morning and really eager to see that. And so it's hard to tell how much that softening has been. But I do think it's clear it reflects both labor supply growth having slowed pretty notably, but also labor demand growth.

8:50And so, so far it seems, and again, we'll learn more, that there's a kind of rough, unusual balance there. And so we haven't seen a significant unemployment change. But that's something I'm watching really carefully and I'm really attuned to. Just to follow up, though, on we have not seen a significant unemployment change setting aside the data, which is going to be noisy for all kinds of reasons, because that's September, which is ages ago. And then the date after that will be affected by the government shutdown itself, which is why we're getting data. So who knows how long it'll be until we have clean data.

9:22But that being said, do you have any way to anticipate actual deterioration? Because the concern is that once the unemployment, the layoffs really start to snowball, then they start to feed on each other and they accelerate and people talk about non-linearity potential. Are you concerned that by waiting or too much for the data to reveal, oh, the weakness is here, that you won't have been able to get in front of a deterioration? It's really important to be forward looking. And as you say, I also have seen past episodes where there's been a dynamic which can move quickly. And so it's important to recognize that.

10:03So are there risks on the labor market side? Absolutely. And that's something that I'm attuned to. But that's not the only consideration in terms of making monetary policy decisions. It's really about balancing those risks and looking at, to the best of one's ability, how do you assess which of our goals from Congress is further away? And I think that the reasons that you're talking about, some of that shift in risks, increase in risks in the labor market, was a good reason for the easing, the 50 % basis point cuts that we have already done this fall. And I think that that has actually positioned us, given what I know now, and obviously still watching could evolve.

10:49Lots of caveats. And so I think that the shift in that balance of risks that I started being quite focused on over the summer was really a rationale for those cuts that we've already seen. At the same time, we have now moved much closer to a neutral rate and we're balancing those risks on the labor market side with continued risks related to inflation and elevation and policies really only mildly restrictive in my view. And so I, given what I'm seeing so far, continue to see that as appropriate for now. We're going to get into each one of those points, but I have a very quick process question.

11:30And I realize we're in unusual circumstances at the moment. But when the jobs number hits, presumably tomorrow on Thursday, again, we're recording this on Wednesday, November 19th, but when it comes out, what actually happens? What do you do when you see that number? Do you immediately go into analysis mode? Do you start calling fellow Fed presidents and talking about what it means? What happens? Yeah, that's a great question. So, of course, we have busy schedules and all kinds of other things going on. And sometimes when the data hits, I'm in other meetings or with other groups. I am well aware of when it is due.

12:07And we do have a process. I have a very strong Boston research team of experts. And so, you know, as soon as the numbers come out, I do try to take a quick look at them. And then we are sometimes virtually and, you know, get together relatively quickly to assess what we're seeing in those numbers. So I have help to try to unpack them. Often the real information is in the details. It's not necessarily just the headline number. In fact, that can mask a lot of what's really interesting about the information. We then take some time to unpack it. And we want to contrast those data with what we had already seen, right?

12:47Because you're adding new information. It's not going on to a kind of totally clean palette, right? It's additional information. So we're doing all of that. And I'm working with my team. And then I do, of course, talk to my colleagues as well. But the immediate analysis is more within our teams in each of our reserve banks. And one more process question, but it strikes me that one of the unusual features of our very unusual environment at the moment is just the sheer amount of Fed speakers that we've had in recent days. I started counting them up yesterday and I got nine in less than a week. And I think then our friend Tom Barkin, friend of the pod, put out a speech or a research note as well.

13:28So that brings it up to 10 in less than a week. What's going on? Why does everyone have the urge to sort of stake their ground ahead of a meeting that, you know, the market currently implies could be a coin flip? Well, all the more reason to hear a range of views. I mean, I think one of the strengths of the structure of our federated system is it really does bring different viewpoints. And, you know, it's interesting because sometimes there's a claim that there's too much group think. I don't see groupthink. Not this week. No, I really don't. And so I think we have also a responsibility to explain what we're seeing, how we're thinking about things.

14:07And that's part of that communication that we do. And so I actually think that's important. And I think recognizing that the breadth of views is partly us coming together, is sharing information, and is part of that process. So there are different windows when I think you hear lots of speeches. This is certainly not an isolated time, but it's when there's, you know, kind of less clarity, perhaps when they're turning points in the economy, when you're more likely to see many of us out there talking about what we're seeing, also talking about how our regional information contributes to that in different ways.

14:47And we're often talking while we're out in our regions, connecting with different people. And so there's kind of multiple dimensions about why we're out and about and what we're doing.

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16:24Hi, this is Shirley Strawberry from the Steve Harvey Morning Show. Toyota-thon is on. So stop by your local Toyota dealer for incredible year-end deals on the cars, trucks, and SUVs known for their legendary reliability. Like the stylish and efficient Camry, the ready-for-anything RAV4, or check out a rough and rugged Tacoma or Tundra. all with great financing and lease options available to qualified customers. Visit BuyAToyota.com to find out more. Toyota, let's go places. Let's talk about inflation. So Core PCE, as of the August reading, which again feels like ages ago now, but it's the data that we have.

17:09So that came in at 2.9%. So that's clearly elevated and solidly above target. You know, if you just had like a snapshot, you're looking at the unemployment rate, you're looking at the inflation reading, that 2.9%, how much does the significance of that change because it comes after years of missing the inflation target to the upside versus if we just had the snapshot? How much of your thinking is sort of informed by the fact that not only has it been high, but it's been high for a really long time? I do think that the longevity of that elevation is a key factor to figure. It's hard to, you know, to put a particular weight on that.

17:50But I think about the balance of risks. Yeah. But so let me say a few things on the inflation side. But first, related to that specific question, you know, I do think that it is a bit of a reminder that it's economic behavior that is not, you know, 100 percent predictable. And many of our analyses that are based on periods when people were really used to very low inflation, maybe a bit noisier signals of what kind of responses and changes we're going to see. And so I do think that complementing those analyses, you know, of course, those are extremely valuable. And we continue to look at we're total we're all data geeks here.

18:33You know, that's kind of what we do with the conversations we have, understanding how businesses are thinking about things. And so I hear that businesses are mindful that they have raised prices significantly over recent years. They're concerned about what consumer responses will be. I've recently been hearing a number of firms, at least in the New England district, the Boston Feds district, which is most of New England, saying that they have been passing price increases and they have been perhaps surprised in some cases that consumers are not pushing back and that's leading them to expect that they might continue to do that.

19:11So I think that gathering a range of information to complement how our understanding of behavior is important. And that does factor into some of the scenarios I think are plausible. They're not necessarily my baseline. My baseline scenario on the inflation side is that inflation is likely, I think, to stay elevated through the rest of this year into early next. And then as tariffs work their way through the system, which I think is going to take some time, and I'm happy to talk more about tariffs. I suspect we may want to come back to that. I think that the disinflation process, perhaps slow and uneven, that we had seen earlier is likely to kick in.

19:53So my baseline is a relatively benign one, both on the inflation side and on the real side of the economy. But I don't rule out scenarios where there's a larger increase in inflation or there's more persistence. And some of that has to do with behavioral responses that might reflect having been in an elevated environment for a long time and concerns about profit margins, concerns about catching up to some of the past changes and how people think about price levels, which is something that many of our models are not as focused on. I hear a lot about price levels when I'm out and about. High cost of living, housing in particular, but not only, child care, food.

20:37That is the number one challenge that I hear about when I'm talking to people, particularly low and moderate income communities, but not only. So since we're at a research conference at the Boston Fed, I need to bring up a really good research paper that came out of the Boston Fed back in October, I think. And it was looking at inflation expectations now and comparing them to what happened in the early and late 1970s. And the finding was that the rise in inflation expectations around COVID might not have had that much to do with actual prices, but actually outran the prices and sort of became de-anchored a little bit from reality, which is what we saw in the late 1970s.

21:18Is the concern that people, you know, after five years of above target inflation, after price levels going up, as you just put it, that our expectations for inflation start to become unmoored from reality? Is that the nightmare scenario for you at the moment? It certainly would be a concern if I were to see evidence that especially medium to longer term inflation expectations were becoming unmoored. I'm not seeing that right now, but it is something I watch carefully. And I do think that at least certainly so far in my baseline, as I said, That is on the more benign side. You know, it's not expecting that that would happen.

21:58In particular, we're not seeing those labor market pressures with the softer labor market. But is it a concern? Is it something to watch carefully? It is. And, you know, it's something that I know some are more concerned about than others. Well, talk to us about how tariffs play into inflation expectations, because this seems to be a difficult one to call. You have the initial rise in prices and then no one is quite sure what happens after that. The consensus seems to be that it's this one-off shift and then inflation should start to cool. But on the other hand, we're hearing a lot from consumers, as you say, about price levels themselves.

22:35So quite a bit to say about tariffs. So let me unpack a few of the things that are really top of mind for me. One is when certainly when I say that, you know, my baseline expectation would be that tariffs have a one time impact on prices. One time doesn't mean it just happens in a week and it's done. That one time can get implemented over months, a year, something like that. It just says that it's not expected to be a continual increase once the level has adjusted. you don't get additional impacts. But that can happen over time. So that's one point. And I do think that in a period of high uncertainty, and the tariffs are really intertwined with uncertainty, something to come back to, and the long elevation of higher prices that we were just talking about, you might actually expect the time for businesses to pass things through to be elongated, right?

23:39And so then you start worrying more that people get used to these continual price increases and you kind of get stuck, right? So that's a scenario, again, not my baseline, but is one that I think one could think about. So a few things about tariffs. One is the tariffs are really intertwined with uncertainty, which makes, you know, it's uncertainty about the tariffs, which is one of the key things that's having influence, for example, in terms of hiring decisions, investment decisions, some of the reticence that firms have to make major decisions and projects, and also in terms of teasing out empirically, right?

24:19It's going to take some time. Our staff at the Boston Fed is doing quite a bit of work on a variety of dimensions, and that includes analysis that takes into account that many of the tariffs are impacting imported intermediates. And so there are multiple dimensions and levels, and you've got to take all of that into account. And we're also doing a lot of analysis on what happened in 2018. What can we learn from that? Because we've had enough time that's elapsed. And actually one of the papers at our conference will be drawing some of the lessons from a kind of more comprehensive analysis of that experience.

24:55You know, just one thing that they've already been talking about is then was a much smaller tariff increase. It was narrower and it was implemented over a relatively short time period. It still took five months or more before the peak impact on price levels was seen. And there are reasons to think it might take even longer this time. And then the survey data, and we're doing survey data at the Boston Fed, particularly focused on small businesses, which is a group we don't have as much line of sight into. And the conversations that I've talked about, That helps to inform things. And then just one final thing, because I think it's both intellectually interesting, you know, if I put my academic hat on, but also really important.

25:40We've also seen significant increases in productivity. And that is interacting with some of the tariffs, perhaps offsetting the extent to which we're seeing the impacts of tariffs on prices. because productivity growth is actually an opportunity not to pass things through because it enables cost savings, et cetera. So there's a lot of things going on with tariffs, which make them hard. I think this is going to be an area we will be able to, we will continue studying and learning about for some time to come. I like your characterization of, I guess maybe you'd call it the long one-off, right? There can be a one-off, but it doesn't just mean the price level resets from today to tomorrow.

26:24It could just be the sort of long process where some new equilibrium is formed, maybe months, maybe years, et cetera. I'm really interested, though, in those conversations that you have with New England businesses about tariffs. You mentioned perhaps some of their surprise that they were able to pass on price increases to the degree that they have. What else are companies saying about sort of the operational effects, the day-to-day effects of how they're managing their business in light of tariffs? What substantive things do you hear about? So a number of different things. A lot of the tariff conversations that I've had really are intertwined with navigating uncertainty.

27:03So one of the things that I've heard is it's challenging to navigate and make adjustments based on a very different tariff level. But if we knew exactly what it was and it was going to stay there, that would be much easier to adjust to than back and forth and uncertainty. And that creates some hesitancy. It also creates or adds to, because I think this was already there, what I'm calling almost an efficiency mindset where firms are reticent to hire because they're not sure how things are evolving and tariffs are a cost increase, to the extent that you can offset that through efficiencies, that is one way forward that is almost kind of like a no regrets type of investment, because whatever happens with the tariffs, if you found efficiency improvements, that will have been a helpful kind of context.