Observations on the Economy, and the Vibrancy of Smaller Cities

Takeaways from Boston Fed President Susan M. Collins' Remarks

1. Collins said the U.S. economy is in a good place overall.
   Activity continues to grow at a solid pace. Collins anticipates "that inflation will return to the Fed's 2 percent target in a timely way - and crucially, amid a healthy labor market."
2. On monetary policy, she said given the disinflation progress to date, further adjustments in the policy rate will likely be needed after the September initial rate cut.
   "My confidence in the disinflation trajectory has increased - but so have the risks of the economy slowing beyond what is needed to restore price stability." Collins will remain highly attentive to both price stability and maximum employment, the two parts of the Fed's Congressional mandate.
3. Collins said labor-market conditions are no longer too hot, nor too cold - softening from the unsustainably tight job-market conditions a year ago.
   The unemployment rate remains low by historical standards. Job growth has slowed on balance in recent months but remains relatively solid. We continue to see a low level of initial claims for unemployment insurance, as well as muted levels of continuing claims. "A labor market with supply and demand in better balance is a key reason for disinflation becoming more broad-based" said Collins, adding that the goal is not further cooling in the labor market.
4. Inflation's components show services prices (excluding housing) expanding at a rate more consistent with 2 percent overall inflation, while housing inflation has moderated some recently - but is the most "sticky."
   Housing inflation "remains above its pre-pandemic average despite some recent improvements. However, there are good reasons to think that this stickiness in current shelter inflation reflects existing rents still catching up to new market rents," she said.
5. Current, elevated wage growth reflects robust gains in worker productivity and therefore, should not necessarily lead to additional price pressures.
   While nominal wage growth has exceeded inflation for the past year, this follows a period when inflation outpaced wage growth - so wages are in part catching up to past price increases. Also, real wage growth over this recovery has yet to match measured productivity gains; Collins noted Boston Fed research that concludes nominal wage growth could continue to exceed inflation for a while but remain consistent with the on-going disinflation process.
6. Finding economic resurgence in the face of long-term challenges often involves local people willing to collaborate across sectors on shared goals and strategies. Collins noted the growing "playbook" of effective local strategies that New Englanders are deploying.
   "Some locales have focused on business retention and recruitment and strengthening neighborhoods. In others, local leaders have decided to focus on reducing impediments to participation in the labor force - addressing tangible problems like job readiness, childcare, and transportation. In others, people are focusing on entrepreneurship support." Collaborative leadership across sectors can be "easy to say, difficult to do" - but is vital.