Collins visited Rhode Island to meet with company executives, small business owners, nonprofit executives, and labor leaders as a way to get a sense of how communities are experiencing the economy beyond just the data indicators.
She said that businesses in the South Shore recently revealed what she described as a “two-speed economy” that may be emerging in the state. On Cape Cod, for example, high-end hotels and restaurants recorded booming business. But reservations for the more budget-friendly establishments were seeing people booking shorter stays and far less in advance, Collins said.
“Households [that] have strong balance sheets and wealth are doing well, and others, especially lower income, are struggling more,” she said. “And we hear that from firms as well in terms of consumers trading down. So that also adds to uncertainty, causes firms to wait and see in terms of hiring and investments.”
The job market in Massachusetts has stagnated, with little hiring happening, even as employers have refrained from instituting mass layoffs. The unemployment rate has outpaced the national jobless rate but has stayed at 4.8 percent over the past few months. But job-seekers have said that it is taking them longer to find work, particularly in areas beyond the region’s centers of economic activity, such as Boston.
Even though inflation remained elevated above the 2 percent Federal Reserve target, Collins said core inflation, which strips out the volatile food and energy components, suggests there was improvement. Shelter inflation, after spiking during the pandemic, was showing signs of a gradual decline along with other service related prices, toward the 2 percent target.
“So where is that elevation coming from at the moment? It’s largely coming from increases in goods cost inflation, which does seem, to me and to my team, to be largely associated with tariffs,” she said.
Collins said her outlook is that inflation will remain elevated at just over 3 percent throughout 2025 and into early next year, but she thinks once tariffs work their way through the economy, the trend could resume its decline.
“My baseline outlook says that … once prices have been adjusted for the increases in tariffs, that’s assuming we don’t keep getting new tariffs and more retaliation, then I’m expecting that inflation will finally start to come back down,” she said. “We had been on a trajectory back to 2 percent and had gotten pretty close.”
Collins voted for the Federal Reserve’s quarter-point rate cut in September that reduced the federal funds rate to a 4 percent to 4.25 percent range amid concerns that the job market was softening.
She told the Globe on Tuesday that the direction of monetary policy at the moment was about balancing the upside risks when it comes to the Federal Reserve’s dual mandate of maximum employment and stable prices.
Collins said that over the last two months, the upside inflation risk has slightly diminished partly due to tariffs not coming as high as initially expected in April and the retaliation has been less severe than anticipated.
“Some of it is getting passed through, but not necessarily all, and that’s taking more time,” she said.
The softening labor market is limiting pressure on wages, and thereby inflation, but the improvement in productivity is helping earning growth for workers.
On the jobs side, the decline in growth is partly due to a drop in the supply of workers related to restrictions in immigration and a decrease in demand from employers.
“[This] makes the labor market more vulnerable to a context where the demand might decline much more than the supply, which would result in a larger increase in unemployment. That would be unwelcome,” Collins said. “So I do see, from my perspective, that the risk on the labor market side has gone up a bit, and the risk on the inflation side has diminished a bit.”
That dynamic is why she felt it was warranted to “dial the restrictiveness back a little bit” and support a rate cut in September.
“I still think that some moderate restriction is appropriate, given that inflation is still elevated after four and a half years, and it’s actually moving in the wrong direction right immediately,” she said.
Asked if she would support more rate cuts at the upcoming meetings by policymakers in October and December, Collins said she did not want to suggest that move indicated a preset course.
“The 25 basis point decline, to me, was dialing things back and, from my perspective, under my baseline outlook, gradual easing over time,” she told the Globe. “So I don’t want to suggest that, because we eased in September, it should be expected that we will ease at each of the next meetings.”
How the economy evolves over the coming weeks, will guide her thinking on what do with rates, she said.
“We really need to see where economic conditions are and what the balance of risk is, so moving gradually means over time, but not necessarily at every meeting and not necessarily at the next meeting,” Collins said.
Omar Mohammed can be reached at omar.mohammed@globe.com. Follow him on Twitter (X) @shurufu.
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