Reflections on Phasing Policy Amidst (Pandemic) Uncertainty
October 11, 2023
The 2023 Goldman Lecture in Economics at Wellesley College
Takeaways from Boston Fed President Susan M. Collins’ October 11, 2023 Remarks
- Collins highlighted three main forms of uncertainty that monetary policymakers confront, all present in the pandemic era.
The first relates to data and measurement – how accurately statistics describe the variables they intend to measure. The second relates to relationships between key economic variables that influence policy decisions – examples include the links between a tight labor market and inflation dynamics. The third is related to unforeseen events, such as pandemics, natural disasters, or geopolitical developments.
- For policymaking, the appropriate response to uncertainty depends on its type as well as the context.
Uncertainty can call for policy to move unusually rapidly – or to take a more wait-and-see approach. In the current policy cycle, this has contributed to different policy phases, starting with a period of holding rates low when pandemic-related risks were still high, followed by a period of aggressive moves, and then the current more gradual, patient approach to policy.
- Some special factors have impacted the pandemic recovery that make it difficult to compare to previous business cycles, adding to the uncertainty.
Despite many expecting a slowdown this year, demand has remained remarkably resilient to date. Household balance sheets have been solid, partially due to savings accumulated during the pandemic, and corporate cash holdings have been elevated due in part to locking in financing at previously low rates. Factors like these have likely made the economy less interest sensitive than during past tightening cycles, to date.
- With progress on inflation and continued elevated uncertainty, the FOMC appropriately shifted to a new, more gradual and "patient" policymaking phase.
Though inflation levels are still too high, taking the time to holistically assess incoming information is warranted. It reflects the fact that we are likely close to the peak of this tightening cycle, with the risk of inflation remaining persistently high more closely balanced with the risk of slowing activity more than needed to achieve price stability. Still, Collins expects we'll need to hold rates at restrictive levels until we see evidence that inflation is on a sustained path back to 2 percent.
- Collins remains realistic, but optimistic, about restoring price stability without a significant economic downturn.
Overall, she continues to be realistic about the economic uncertainties and risks, but optimistic that price stability can be restored with an orderly slowdown in activity and only a modest increase in the unemployment rate – an outcome consistent with both parts of the Fed's dual mandate.
- One key policy lesson, Collins suggests with the benefit of hindsight, relates to risks from supply shocks.
The pandemic represented uncharted territory for policymakers; and risk assessments, however difficult to make, had to be made. But Collins observes that the risk of widespread, binding supply constraints may suggest a stronger case than previously realized for insuring against too-high inflation by removing policy accommodation more quickly.
- Collins also offered some takeaways to students about learning and careers.
She recommended a mindset of lifelong learning and seeking out thoughtful, capable people with diverse perspectives. In working environments, she also underlined the importance of gathering information broadly – quantitative and qualitative – and intentionally hearing from a wide range of stakeholders, including voices that have not traditionally been "in the room."