Fed's Collins says rate cuts are possible in 2024: YF Exclusive

Federal Reserve Bank of Boston President and CEO Susan Collins believes in the Goldilocks economy: that special, just-right place where the Federal Reserve’s dual mandate of full employment and stable consumer prices happily co-exists.

And she thinks the US economy has a good shot of getting there if it isn’t there already.

“I continue to be that realistic optimist,” Collins told Yahoo Finance in an exclusive interview in Lawrence, Massachusetts, a former textile town some 28 miles north of Boston.

“I am optimistic that we're going to bring that inflation down, but we're going to do it amid a labor market that stays quite healthy,” she says.

Yahoo Finance spent the day with Collins as she connected with business owners and community leaders in her district - District 1, one of the largest in the Federal Reserve’s 12-district system that covers six states from Maine to Connecticut - to gauge from the ground up how interest rates and monetary policy are affecting everyday Americans.

"A lot of the data is telling us what happened last month or last quarter, and when we talk to people, they're telling us what they're seeing right now," said Collins. "They're telling us about their plans and how they see things evolving. And so that's one thing that's important. It also helps to kind of flesh out what the data are telling."

Does the Fed think the battle to tamp down inflation has been won? Will it begin to cut rates, and if so, when, and by how much? Yahoo Finance's Jennifer Schonberger got a rare opportunity to ask these questions and more. Watch for the full interview here.

This post was written by Corey Goldman.

Video Transcript

The market is keenly focused on Fed, moves and Fed speak.

We rarely get a look at the day in the life of individual fed members.

For more, we bring in our own Jennifer Sha Burger who had a chance to sit down with Boston fed President Susan Collins earlier this week, Jennifer, thank you, Maddie.

The Boston Federal Reserve invited me to spend the day with President Susan Collins earlier this week in her district in Lawrence Massachusetts where she talked to local bankers, community developers and businesses gaining information first hand on the ground about the economy, information that she uses to gain an overall picture of the economy for decisions on setting interest rates.

Susan Collins is one of the most powerful people in America.

The president of the Federal Reserve Bank of Boston, the first woman of color to hold that position belongs to a select committee in Washington DC that decides whether interest rates should go up down or stay the same.

We had an exclusive peek into how she makes decisions that influence what you pay to borrow money for a home car or what a bank pays you to open a savings account.

The FED has held rates at a 23 year high in the range of five and a quarter to 5.5% for nearly a year as it tries to tame inflation.

And right now, Collins and her colleagues at the Fed are wrestling with a vexing question.

Has inflation cooled enough from its pandemic highs to start cutting rates.

We're going to have to let the data really tell us when it's clear that we're sustainably on a path.

And that means looking at a wide range of data in June, the Federal Reserve opted to hold interest rates steady in the battle to bring down inflation.

It signaled just one interest rate cut this year.

Part of the decision for setting interest rates from information gleaned by regional fed bank presidents on the ground in towns and cities across their districts like this one in the first district which spans six states from Maine to Connecticut Collins monitors key data from the personal consumption expenditures index to the monthly jobs report for clues on the direction of inflation and the economy.

But it's also important for her to talk to local businesses, banks and consumers to see if the official data line up with what she's hearing on the ground.

A lot of the data is telling us what happened last month or last quarter.

And when we talk to people, they're telling us what they're seeing right now.

They're telling us about their plans and how they see things evolving.

And so that's one thing that's important.

It also helps to kind of flesh out what the data are telling.

We were invited to follow Collins around for the day in Lawrence Massachusetts, a former textile town 28 miles north of Boston, seeing a Renaissance Collins started her day hearing from a local group of bankers and real estate developers who discussed how investments made in refurbishing low income neighborhoods have fueled the local economy's redevelopment over the past 10 years.

Why don't we start with introductions?

Let's go around the table.

She went on to hear about the impact inflation is having on local businesses and the desire for lower rates, the cost of living is getting out of control and the rent is something.

Let me tell you extremely out of control.

Extremely out of.

One of my key takeaways was really understanding some of the challenges that the higher inflation that we had endured is creating, especially for smaller businesses and the fact that labor markets are actually coming, improving, it's getting easier for people to hire and there's much less turnover.

Despite the fed's dual mandate of promoting maximum employment and stable prices, inflation has been the greater focus for the FED as it's opted to hold interest rates steady while other central banks have started cutting rates after a scare earlier this year, that inflation may be stalling or re accelerating in the first quarter.

The latest readings confirm prices aren't accelerating but may be moving down slower than thought.

It's inflation.

We're, we're all consumers at the end of the day, we all buy food at the end of the day.

And our biggest challenge over the past three years has been, how do we provide a high quality product at a price that people are willing to pay?

The data suggests an economy with demand and supply coming into better balance, which is what's required in order to restore price stability.

But this process may just take more time than previously thought.

It's too soon to tell whether inflation is durably on a path back to 2%.

What Collins and her colleagues watch closely is the fed's preferred inflation gauge the so called core personal consumption expenditures index.

It showed inflation grew at 2.8% year over year as of April.

A level unchanged from March.

Another measure of inflation, the more popularly cited consumer price index on a core basis rose 3.4% in May cooling from the 3.6% increase seen in April and 3.8% in March.

Both are still above the fed's 2% target.

Jonathan Isaacson is CEO of Gem line, a business based in Lawrence which prints custom logos for companies on a variety of swag from backs to hats and even coolers.

Gem is one of the largest employers in the city in Isaacson says he hasn't been able to push through price increases to customers.

The time of being able to just hand off price changes is now over from our perspective during COVID, we did pass through a number of price changes and everybody understood it today, things seem to have normalized and people just aren't accepting it anymore for economists.

That's one of the first indicators that inflation is likely to gradually come down.

I think the data that we have seen recently in terms of CP I, in terms of the producer prices, it is consistent with an economy that in an orderly way is becoming better aligned.

But we also first quarter saw news that was more disappointing and the inflation numbers in particular, but other data as well, those monthly numbers are really volatile.

The volatility is still quite elevated.

And so I do think we have to be patient Collins and her fed colleagues don't expect to lower rates until they gain greater confidence that inflation is moving sustainably toward their 2% target is September too premature to think about cutting rates.

Are we looking at something later in the year?

More like November, December?

I think we're gonna have to let the data tell us.

So it seems to me that there are very plausible scenarios um where we um you know, later in the year, it would be appropriate if we see strong continued good news on inflation and an economy that is aligning.

Are you looking at one or two rate cuts at this point given where things are, I could imagine scenarios that would be consistent with both.

I mean, I I think that as I look forward, um my view of how much easing might be appropriate this year has uh been reduced.

As I looked at the data, Collins is also watching for any signs of a slowing economy which would help the argument for lower rates.

The official data indicate the economy may be cooling growth in the first quarter slowed to 1.3% from three 0.4%.

But on the ground in Lawrence, Julie Thurlow, Ceo of Redding Cooper Bank and chair of the American Bankers Association says the economy looks resilient based on demand for loans outside of housing.

I'm optimistic that we that a soft landing is in our future.

We still see demand.

Consumers are still spending, interest rates are high, but I think it's more of a structural problem that we have as far as housing is concerned.

Collin says she sees a solid economy overall, that's showing healthy signs of cooling.

What I see in the statistical data is certainly evidence that the economy is coming into better balance.

There's been some slowing in demand but an economy that's still solid, but it's still quite mixed.

There are differences across sectors, there are differences across regions and what I heard today.

It's very consistent with that in the sense of some firms that are still seeing quite strong demand and others where they are seeing consumers being, you know, a bit more cautious in terms of their spending.

What's the risk that in the quest to gain confidence that inflation is dropping sustainably back to 2% that you hold rates at current levels so long that you sow the seeds of a recession.

So the risks are absolutely two sided and both sides of our mandate are top of mind for me.

So I do think that there is a risk that if we held too long, we would see more slow down than we need.

And that's something that I watch carefully, you know, II I think that labor markets are still strong.

I think they are not overheated the way that I would have described them earlier, but continuing to watch what's happened across a range of indicators in that space is also important in terms of the timing that will be appropriate to change the stance.

So the soft landing still in place.

Well, I continue to be that realistic optimist, optimistic that gonna bring that inflation down, but we're going to do it amid a labor market that stays quite healthy.

And um you know, lots of uncertainty around that.

But I still see that possibility as being very much the path that I believe and hope we're on.

My big thanks to Susan Collins in the Boston Federal Reserve for the opportunity to learn firsthand and share with the public what Fed officials do to make decisions that really affect each and every one of us.

Mattie Jennifer.

Thank you so much for bringing us the fantastic conversation and for also getting access to uh Susan Collins Boston Fed President for the full day.

It was really wonderful to see uh your reporting work at hand there.

Appreciate it.