With inflation showing little sign of easing, the Federal Reserve is holding firm on interest rates to cool off the economy and get inflation levels down to 2% (from 3.4% currently).
Officials haven’t provided a specific time frame for when to expect a cut to interest rates, but Susan M. Collins, president and CEO of the Federal Reserve Bank of Boston, believes 2% is important. But it might take some time to get there, she said.
“While I’m realistic about the risks and the uncertainties, I do remain optimistic that this can be accomplished in a reasonable amount of time with a labor market that remains healthy,” she said, reiterating that there is “a significant amount of uncertainty around that outlook.”
“The recent data leads me to believe that it’s just going to take longer than previously thought, and there is no preset path for policy,” she said during a May 8 event hosted by the MIT Golub Center for Finance and Policy.
Collins made her remarks during a discussion with MIT Sloan professor Here’s what Collins had to say about inflation, interest rates, and artificial intelligence in finance.
On managing inflation
Collins is optimistic that inflation can be brought back down to 2% — the Fed's target — but acknowledged the challenge of parsing “noisy” data. Economic activity and the labor market are strong, but some components of the rate of inflation are “sticky” (like shelter) despite other components’ rates of increase coming down (like some goods).
“If you look at monthly inflation numbers, the volatility is still elevated compared to historic numbers,” Collins said. “I would say that unevenness in the disinflation process is to be expected. It is not a big surprise to see some less-welcome news after such a string of positive inflation developments, but it’s enough data that it’s important to really take it seriously.”
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On cutting interest rates
In the span of about a year and a half, the Federal Open Market Committee raised interest rates 11 times, bringing the federal funds rate to a 23-year high of 5.25%-5.5%, where it’s been since July 2023. The idea is that higher rates help restrain the rate of inflation by helping supply and demand come into better balance in the economy.
“Rate hikes were unusually rapid, moving the monetary policy stance from highly accommodative to restrictive,” Collins said. “We’re now patiently assessing how long it will be appropriate to maintain this target range.” To make that call, she’s keeping an eye on the labor market, short- and long-term inflation expectations, disinflation signals, and wage and price stability.
Collins called the current interest rate approach “moderately restrictive” and said there are potential risks in easing interest rates too soon. Doing so “would make our job of restoring price stability more difficult, and there are risks from holding rates high for too long, which would lead to unnecessary economic disruptions.”
On incorporating AI in finance
AI is already being used in finance in a number of ways. Generative AI tools, specifically, can analyze market trends, create predictive models, and run compliance checks. Financial advisers are also using it when creating investment strategies for clients.
Collins said it’s unlikely that AI would be used to make decisions on monetary policy, though it could be used to gather and make sense of information on economic trends. For example, economists could use AI when analyzing large amounts of text from firms when crafting overall inflation expectations.
“I think some of that real-time data is an example of some of the kinds of things that can be very helpful for us going forward,” Collins said.
