Inflation Alert! Boston Fed President Susan Collins today in speech: “It is premature to signal how high rates should go,” "A focus on the level – not the pace- is what resolve’ looks like in this second policy phase,”
Good morning, and thank you for having me speak with you today. It is truly a pleasure to be hosted by the Brookings Institution for this talk. My association with the Brookings Economic Studies area extends back some 30 years. I have many fond memories of my time as a senior fellow. The nonpartisanship, rigor, open-minded inquiry, and emphasis on impact at Brookings are values we share at the Federal Reserve Bank of Boston.
I also want to mention my appreciation for David Wessel, and his decades of work helping people better understand the economy and policymaking, most recently as director of the Hutchins Center. As a lifelong educator, I see this work as so important.
I joined the Boston Fed as president just a few months ago. In this role, I have the privilege and responsibility of serving on the Federal Open Market Committee (or FOMC), which sets national monetary policy – this year as a voting member.
The committee met this week. At this time of intense focus on the FOMC, I want to share my perspectives on macroeconomic conditions and discuss some key dimensions of monetary policymaking in the current context.
Before beginning, I would like to note that these views are my own, and I am not speaking for colleagues at the other Reserve Banks or the Board in Washington.
Overview
I will start by providing some historical context for current monetary policy. Then I’ll turn to inflation and explore how we got to today’s environment – which is important for thinking about mapping out future policy discussions. I’ll then discuss the recent path of monetary policy and explore some of the challenges to determining appropriate policy going forward – and include some of my own perspectives on monetary policymaking.
Key Context
Not long ago, the challenge facing policymakers was persistently low inflation, and how to increase it to the FOMC’s target. Clearly, this is no longer the issue. Inflation has surged, and remains much too high, with serious repercussions for households, businesses, and the economy.
Congress has charged the U.S. central bank with a dual mandate – price stability and maximum employment. We define price stability as two percent inflation – a low level, where consumers and businesses do not have to focus on protecting themselves from eroding purchasing power. The other facet of our mandate, maximum employment, is less specifically defined. It refers to the broad, inclusive goal of job opportunities for all.
History has shown that low and predictable inflation is an important precondition for sustaining maximum employment over time. In other words, the two dimensions of the Fed’s mandate are intertwined; they work together in the long run. Price stability is foundational to achieving the Fed’s overarching mission, which is a vibrant, resilient, and inclusive economy.
At the moment, with inflation well above the Fed’s 2 percent target, the Fed’s central task must be to restore price stability. The FOMC has moved aggressively towards accomplishing this important goal, but the job is clearly not yet done. I expect more tightening will be needed.
The higher interest rate environment necessary to restore price stability has challenging implications for real people. I take this, as well as the costs associated with too high inflation, very seriously. Indeed, policymakers must balance the risk that inflation remains elevated and becomes entrenched in expectations, against the risk that policy actions excessively slow down economic activity.
The economic environment is, admittedly, highly uncertain but today I will discuss why I am still optimistic about the possibility of restoring price stability while maintaining a relatively robust labor market.
More generally, I will also discuss my perspectives about monetary policy going forward. We are moving from the initial policy phase focused on moving rates into restrictive territory very quickly, to a second policy phase with a focus on determining how high rates need to go to return inflation to the Committee’s 2 percent target over a reasonable horizon. This requires a careful, holistic assessment of available information and deliberate actions. I will say more about this in my remarks as well.
