MNI: Fed's Collins Says Modest Economic Slowdown Achievable

Boston Fed President Susan Collins in her first public speech Monday said the central bank can achieve its target of 2% inflation without causing severe damage to the U.S. economy but it will require the unemployment rate moving higher.

"As monetary policy moves to a restrictive stance to transition the economy to more sustainable labor market conditions, there is apprehension about the possibility of a significant downturn. I do believe the goal of a more modest slowdown, while challenging, is achievable," she said, stressing that price stability sets the foundation for sustainable maximum employment.

"Inflation remains too high," she noted in prepared remarks to the Greater Boston Chamber of Commerce, adding that she anticipates "accomplishing price stability will require slower employment growth and a somewhat higher unemployment rate."

Demand for goods and services clearly exceeds the economy’s productive capacity right now, which is being manifested in a very hot labor market, she said.

"The excessive labor market tightness is illustrated by an historically high level of job vacancies – currently around two vacancies for every unemployed worker – and by the inflationary push associated with rapidly rising wages," Collins said.

DOWNSIDE RISKS

The Fed last week approved its third consecutive three-quarter point interest rate increase and issued projections that showed unemployment rising to 4.4% next year -- up from 3.7% currently -- and interest rates rising more and staying there longer than investors had anticipated, roiling markets. Fed Chair Jerome Powell noted only "modest evidence" so far that the labor market is cooling off.

(See: MNI: Fed's Mester: Wages May Be Stabilizing; Need More Hikes)

But Collins pointed to strong balance sheets and continued labor demand as sources of underlying strength. "Household and business balance sheets are considerably stronger than in previous tightening cycles, reducing the risk of a significant retrenchment in spending and investment as interest rates rise," she said.

"Despite these potentially more favorable conditions, there are of course also downside risks to the outlook. A significant economic or geopolitical event could push our economy into a recession as policy tightens further."