The fact that the Federal Reserve needs to slow demand in order to transition the economy to a more sustainable path does raise concerns about the possibility of a significant downturn, but there is a chance such a dire outcome can be avoided, Susan Collins, the new president of the Boston Fed, said Monday.
“I do believe the goal of a more modest slowdown, while challenging, is achievable,” Collins said in her first speech since taking office in July.
Collins is the first Black woman to run one of the Fed’s 12 district banks since the Fed was founded in late 1913.
In her remarks to the Boston Chamber of Commerce, Collins said she was optimistic in part because household and business balance sheets “are considerably stronger” than in prior tightening cycles.
In addition, companies seem to have “too few workers,” so a slowdown in activity may lead to fewer layoffs, she said.
Collins is a voting member of the Fed’s interest-rate committee this year.
Investors are worried that the Fed’s rapid rate increases will “break” the economy.
Last week, the Fed raised its benchmark rate by three-quarters of a percentage point for the third straight meeting, to a range of 3%-3.25%. That’s an increase of 300 percentage points since March.
In addition, Fed officials surprised the market after their Sept. 21 policy meeting by saying the central bank expects to raise rates to a range of 4.5% -4.75% by next year.
At the same time, the Fed projected that the economy would grow at a 1.2% annual rate next year and the unemployment rate would rise to 4.4%.
Many on Wall Street think that is too optimistic.
Stocks
DJIA,
SPX,
have been down sharply since the Fed’s decision but were mixed in early trading on Monday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.77%.
Read: First thing Fed breaks with higher rates will be the financial markets
In comments during a question-and-answer session, Collins said that inflation is either close to peaking or has peaked already.
Some of the supply bottlenecks are abating, she said, adding, “I hope that continues.”
Asked for her outlook, Collins said she anticipates slower growth this year and next. The process of getting inflation back down is going to include “a modest increase in unemployment,” she added.
There are many uncertainties around this forecast and no one has a crystal ball, she concluded.
