What Susan Collins Wants to See Before Supporting Another Rate Cut

Episode Summary

Executive Summary: The episode centers on a Boston Fed conference and a wide-ranging interview with President Susan Collins about monetary policy amid mixed signals: labor-market softening, still-elevated inflation, tariff uncertainty, and rising AI adoption. Collins argues policy is only mildly restrictive and appropriately balancing both mandate sides, while emphasizing that tariffs, housing, productivity, and AI could all shape the outlook with long lags and significant uncertainty.

Main Topics: Federal Reserve policy under uncertainty (Priority: 5/5): Hosts frame current policy as unusually ambiguous due to conflicting signals, a government data blackout, and a near coin-flip probability of a December rate cut. Collins stresses the Fed must balance labor-market risks against persistent inflation. Labor market softening and non-linear downside risk (Priority: 5/5): Collins says the labor market has softened, but the lack of official data makes it hard to judge severity. She worries about a scenario where weak hiring tips into accelerating unemployment, justifying vigilance and possibly more easing if deterioration becomes clear. Inflation persistence and expectations (Priority: 5/5): The discussion emphasizes that inflation remains above target after years of misses. Collins says elevated prices, not just inflation rates, matter to households and businesses, and that expectations could become unmoored if persistence continues. Tariffs, pass-through, and uncertainty (Priority: 5/5): Tariffs are described as a one-time price-level shock that can unfold over months rather than immediately. Collins says uncertainty around tariff levels is itself slowing hiring and investment, and firms are responding with efficiency efforts and price pass-through. AI as productivity tool and labor-market wildcard (Priority: 4/5): Businesses increasingly discuss AI as a major operational issue. Collins sees AI as a general-purpose technology that can support workers, raise productivity, and create new jobs, though it may also accelerate transitions and downsizing in the near term. Housing affordability and supply constraints (Priority: 4/5): Housing is identified as a major concern in New England and nationally. Collins notes that higher rates affect housing demand and development, but broader price stability and cross-sector collaboration are needed to address affordability and supply shortages. Conference purpose and Boston Fed regional insights (Priority: 3/5): The hosts and Collins explain that the Boston Fed conference convenes academics, policymakers, business leaders, and other experts to analyze complex themes like fragmentation, uncertainty, and global change using both research and on-the-ground intelligence.

Key Arguments: The Fed must weigh both mandates simultaneously: softening labor demand raises recession/unemployment risk, while inflation is still too high after a prolonged miss. Policy is already closer to neutral and only mildly restrictive, so Collins sees recent rate cuts as appropriate given the shift in risks. The labor market appears to reflect both reduced labor supply and weaker labor demand, creating an unusual balance that has so far limited unemployment rises. A sudden rise in unemployment could be non-linear, so the Fed should stay forward-looking rather than wait for perfectly clean data. Inflation expectations are not currently unanchored, but prolonged above-target inflation makes that a key risk to monitor. Tariffs are likely to raise prices over time rather than instantaneously; the pass-through can take months and may be extended by uncertainty. Business behavior around tariffs is shaped as much by uncertainty as by tariff level itself, leading firms to delay hiring, seek efficiencies, and remain cautious. AI is increasingly present across sectors and may boost productivity, but its labor-market effects remain early and uncertain; it could both support workers and enable downsizing. Housing affordability is a structural issue that monetary policy can influence only indirectly; maintaining price stability and employment helps create the conditions for broader solutions. The Fed’s role includes convening, research, and communication, not just interest-rate setting; regional intelligence is important in interpreting economic shifts.

Data Points: Boston Fed conference edition: 69th - Susan Collins is interviewed at the Boston Fed’s flagship economic conference. Fed funds futures odds of December cut: about 45% - Hosts cite market-implied odds as of Nov. 19, 2025, down from the high 60s a couple of weeks earlier. Probability of December cut a few weeks earlier: high 60s - Used to show the sharp shift in market expectations for Fed easing. Core PCE inflation (August reading): 2.9% - The latest available inflation measure discussed in the interview, above the Fed’s 2% target. Recent policy easing: 50 basis-point cuts - Collins says the shift in labor-market risks helped justify the easing already delivered this fall. Government shutdown-related data gap: official unemployment data unavailable for a while - Hosts note the lack of timely official labor-market data complicates policy decisions. Tariff pass-through lag: 5 months or more - Collins references research showing the 2018 tariffs took months to peak in price effects, and current tariffs could take longer. Conference audience mix: academics, policymakers, business leaders, political scientist, other disciplines - Collins explains the Boston Fed conference’s interdisciplinary design. Boston Fed district coverage: most of New England - Collins notes that the Boston Fed district covers most of New England, informing regional business insights. AI adoption horizon: significant share of conversations in the last 6 months - Collins says AI has quickly moved from a side topic to a major issue in business discussions. New England demographic trend: aging faster than the rest of the country - Used to explain some labor shortages and hiring challenges in skilled sectors. Small business survey frequency: quarterly - The Boston Fed has recently started a quarterly small-business survey to improve visibility into the sector.

Pivotal Quotes: "AI shouldn't eliminate them, it should elevate them." — Palantir ad narrator: Opening sponsorship message framing AI as worker-enhancing rather than labor-replacing. "What I think is pretty clear is that we have seen softening in the labor market." — Susan Collins: Her assessment of current labor-market conditions amid missing official data. "My baseline scenario on the inflation side is that inflation is likely, I think, to stay elevated through the rest of this year into early next." — Susan Collins: Her base-case outlook for inflation and the timing of any disinflation.

Implications: The Fed appears likely to stay cautious, balancing labor weakness against sticky inflation. Businesses should expect prolonged uncertainty around tariffs, cautious hiring, and continued AI-driven productivity experimentation, while households may not see affordability relief soon.