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Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY “Assessing the Balance of Risks in the Economy” Remarks to the Greater Boston Chamber of Commerce Susan M. Collins President & Chief Executive Officer Federal Reserve Bank of Boston October 14, 2025 Boston, Massachusetts The views expressed today are my own, not necessarily those of my colleagues on the Federal Reserve Board of Governors or the Federal Open Market Committee. Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY Key Takeaways 1. Economic growth remains solid, despite headwinds from tariffs and uncertainty. But job gains have declined notably — though without a substantial rise in unemployment. Inflation, which had been heading back to the FOMC’s 2% target, has picked up recently and is likely to remain elevated in the near term, largely due to tariffs. 2. The slowdown in hiring this year likely reflects reductions in both labor supply – largely linked to immigration restrictions – and labor demand, a confluence of factors that is difficult to disentangle. This raises the risk that labor demand may fall short of labor supply, which could eventually lead to a more substantial rise in the unemployment rate. 3. Anemic hiring amid solid growth likely reflects firms’ reluctance to hire in a highly uncertain environment, and robust labor productivity growth is allowing firms to meet demand. A productivity-enhancing mindset is ubiquitous in my discussions with CEOs of large and small businesses across New England — including investments in AI as well as in more traditional technologies. 4. Though significantly down from its peak, inflation has risen in recent months largely due to tariffs. I expect the economy to experience some more negative effects from tariffs over the remainder of this year and into early 2026, as pass-through to consumer prices continues, reducing household purchasing power and spending. 5. The upside risk to inflation cannot be discounted after more than four years of above-target price growth. However, a softer labor market, the potential for continued strong productivity gains, and generally stable inflation expectations reduce the risk of inflationary pressures. 6. My baseline outlook for the economy is relatively benign, with continued growth, a relatively modest increase in the unemployment rate and inflation remaining elevated this year and into next as tariffs are passed through, before resuming its decline. But I do not rule out alterative scenarios featuring higher and more persistent inflation, more adverse labor market developments – or both. 7. With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market. Even with some additional easing, monetary policy would remain mildly restrictive, which is appropriate to ensure inflation resumes its decline once tariff effects fade. But policy is not on a preset path, and going forward, policy decisions will continue to be guided by the evolution of the data and their implication for the outlook. 1 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY Thank you, and a warm welcome to all of you. My first speech as Boston Fed president was to the Greater Boston Chamber of Commerce, and it is a great pleasure to be with all of you again today. In those remarks three years ago, I stressed my commitment, as a monetary policymaker, to achieving both price stability and maximum employment – the Federal Reserve’s core mandates from Congress. I also emphasized the criticality of rooting my decisions in data and analytics. I discussed the value of complementing quantitative data with extensive outreach, to gather insights from stakeholders in different sectors and places across New England, and to see “up close” our regional economy – including the opportunities and the challenges. And I noted the breadth of our work here at the Boston Fed, focused on helping to foster a vibrant economy and financial system that works for everyone – not just for some people. Many things have changed since I first spoke with you in the fall of 2022. The economy is in a very different place now, with different challenges for monetary policy. But what I said then holds just as true today. Empirical rigor is always important for formulating an economic outlook, assessing the risks, and determining appropriate policy. This is perhaps especially true in times of change and scrutiny. Diligently explaining how we, as policymakers, are analyzing and interpreting available data is one of the many ways the Fed is, and should be, open and accountable. And accountability must go hand in hand with the independence that history has so clearly shown is essential for central banks to do their jobs well and serve the public – because the independence to make difficult policy decisions, when needed, leads to better economic outcomes for all. I’ll devote much of my remarks today to sharing my assessment of national economic conditions, my outlook, and my views on monetary policy – using some charts along the way to highlight particularly important recent trends. I’ll also mention some of what I’ve learned in my ongoing regional outreach, and the many ways the Boston Fed works to support our District’s economy. But first, my usual disclaimer: these comments reflect my own views. I am not speaking for colleagues at the Fed’s Board of Governors or other Reserve Banks. Economic Activity Three years ago – coming out of the pandemic era – inflation was much too high, and the labor market was unsustainably tight, reflecting demand that was outpacing supply. Since then, 2 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY we at the Fed have made significant progress in achieving our dual mandate goals, as restrictive monetary policy has helped to bring demand and supply into better balance. But still above-target inflation has been rising recently, and while the labor market remains relatively healthy, further weakening would be unwelcome. This is a challenging context for monetary policymakers because rising inflation would call for a tighter policy stance, while a softening labor market would call for a less restrictive one. Policy actions must balance both sides of the Fed’s dual mandate, while addressing the evolving balance of risks. And this task is currently complicated by the reduced availability of economic data, due to the government shutdown. Economic activity has proved more resilient, so far this year, than many – including me – expected. Figure 1 shows two indicators of real GDP growth. The blue line shows the more typical year-over-year measure, which is still just above 2 percent, and close to many estimates of trend (or “potential”) U.S. output growth. But this masks considerable short-term variation in growth, as is evident from the red line – the two-quarter (annualized) measure. It highlights that, while economic activity has slowed relative to 2024, some of the step-down early this year has been reversed. 1 Available data suggest that spending has remained robust in the third quarter. In particular, consumption growth moved up this summer, 2 while indicators of business investment continue to be favorable – especially in equipment-related categories. In fact, recent data have led forecasters to raise their predictions for third-quarter GDP growth. 3 Demand has remained steady overall, despite headwinds from tariffs and the high degree of uncertainty in the economic environment that so many contacts report. One reason for this resilience is that generally healthy financial positions of firms and households are supporting their spending, though there are potential signs of strain for some smaller firms and lowerincome households. 1 Moreover, other broad indicators of economic activity, such as gross domestic income (GDI) and gross output in the non-farm corporate sector have slowed by less than GDP. 2 Consumption growth was about 2.75 percent on a 12-month basis in August. For example, the Blue Chip Consensus forecast increased from 1.3 percent in September to 2.5 percent last week. 3 3 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY And while I continue to hear from contacts around New England 4 about economic uncertainty weighing on investment decisions, many firms seem unwilling to postpone investments related to automation and AI. Receptive credit markets and still-favorable financial positions, especially for larger firms, give many companies the capacity to make these expenditures. The Labor Market Although economic growth remains solid, job gains have declined notably, as shown in the left panel of Figure 2. However, at least so far, the slowing pace of hiring has not led to a substantial rise in layoffs. Initial claims for unemployment – the blue line in the right panel of the figure – remain fairly low. And the unemployment rate – the red line in the right panel – has only edged up over the past 12 months through August. Based on available information, the unemployment rate should also have remained low in September. This marked reduction in employment growth reflects a combination of slower growth in both labor supply and labor demand that is difficult to disentangle. On the supply side, the decrease in immigration has clearly slowed labor-force growth – but it is unclear by how much. The inflow of immigrants has fallen sharply. However, it is hard to gauge the outflow of immigrants who were already in the country. 5 Reduced labor supply from immigration has important implications for how we think about trend, or “break-even,” employment growth – that is, the pace of monthly job gains needed to keep up with increases in the labor force and prevent a rise in the unemployment rate. Before the pandemic, this trend was estimated to be around 80,000 new hires per month, with about half coming from immigration. Using those numbers as a rough benchmark suggests that, if immigration does not contribute to labor force growth going forward, then the pace of hiring needed to keep the unemployment rate steady could be around 40,000 jobs per month. The Fed’s First District covers the six New England states, with the exception of Fairfield County in Connecticut. 4 There remains a backlog of applications for work permits from migrants already here, though some previously approved permits have been revoked. 5 4 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY An important question is whether the lower recent hiring pace is still sufficient to keep up with current trend-employment growth and maintain a relatively stable unemployment rate. Unfortunately, the answer is clouded by the uncertainties I just highlighted regarding the impact of reduced immigration on the labor force, and by the delayed employment report from the federal government, given the shutdown. Furthermore, recent job gains have been concentrated in just a few industries. This broad-based slowdown in hiring raises the risk that labor demand may fall short of supply, which could eventually lead to a more substantial increase in the unemployment rate than we have seen so far this year. Hefty productivity gains have enabled many firms to meet still-solid demand for their products without substantially increasing their head counts. As shown in Figure 3, measured output per hour worked in the non-financial corporate sector is running well above its average pre-pandemic pace. 6 This productivity-enhancing, cost-saving mindset is ubiquitous in my recent conversations with CEOs of large and small businesses throughout New England. It also appears that firms in some sectors are maintaining their output, with little or no hiring, by having employees work longer hours. 7 I see these patterns as related to the high degree of uncertainty in the current economic environment, where concerns about tariffs and the prospects for automation and (increasingly) AI are making firms hesitant to hire. However, as the uncertainty fades and firms adjust to the new tariff environment, I would expect the pace of hiring to increase. The labor market implications of new technologies, including AI, will likely take some time to unfold. Tariffs and Prices Still, I do expect the economy to experience some more negative impacts from tariffs over the remainder of this year and into early 2026. Tariffs on imported goods act as an adverse 6 In this context it is worth noting that if the Bureau of Labor Statistics’ (BLS) recent preliminary downward (benchmark) revision to job growth from April 2024 to March 2025 is sustained, then measured labor productivity during this period will likely be revised to show even larger gains. 7 While average weekly hours have been stable at the aggregate level recently, there are notable sectoral differences. For example, the average workweek declined in the health-care sector, where hiring has been robust. But it has increased in other sectors, including information, financial services, and retail trade, where hiring has been sluggish. 5 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY supply shock, raising production costs and ultimately making goods and services more expensive. Historically, price increases from an adverse supply shock have been accompanied by lower household consumption, reduced capital outlays, and a rise in layoffs. While we have seen some initial price hikes for goods affected by tariffs, the broader economy has remained relatively robust, as I have already discussed. But as prices in tariff-exposed sectors continue to rise over the next few months, I expect the effects on the real economy to become more pronounced. That brings me to inflation. Figure 4 shows the behavior of the three main components of core personal consumption expenditure (PCE), a disaggregation I find informative. As you may know, core inflation excludes the important but highly volatile food and energy sectors and tends to give a more accurate view of underlying inflation pressures. (Note that in each panel, the blue line shows price growth over 12 months, while the red line shows the timelier, though noisier, three-month measure.) The left panel shows core goods inflation, which has risen in recent months due mainly to tariffs. The middle and right panels highlight that the disinflation process has largely continued in other categories. Core housing inflation, in Panel B, continues its slow, uneven decline. And core non-housing services inflation, in Panel C, has returned to a range consistent with the Federal Open Market Committee’s 2 percent target, though it has recently increased somewhat. 8 Some of the tariffs have already passed through to consumer prices. As shown by the upward sloping line in Figure 5, which is based on analysis by Boston Fed economists, prices in PCE categories that are more exposed to tariffs have risen notably faster than their historical trends. 9 However, the somewhat loose relationship to date suggests there is room for additional pass-through of tariff-related costs. While core non-housing services inflation is above its pre-pandemic range (2012 through 2019), this period also coincides with inflation below the FOMC’s 2 percent objective. Thus, the dashed line in Panel C of Figure 5 shows the mean for 2001–2007, a period when 12-month core PCE inflation averaged almost exactly 2 percent. 8 9 See Barbiero and Stein (2025), The Impact of Tariffs on Inflation - Federal Reserve Bank of Boston 6 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY I see a few reasons to expect further price pressures from tariffs going forward. First, changes in tariff policies have been quite staggered, with some levies only recently going into effect, and others not scheduled to start until later this year. Second, while firms may be willing to absorb some of the tariff costs in the short run, there are likely limits to their ability to offset these costs through productivity gains and other costcutting measures and to their willingness to accept lower profit margins. Ultimately, they are likely to try to pass more of the higher costs along to consumers in the form of higher prices. Surveys also suggest that many firms anticipate additional passthrough, 10 and this is very consistent with what I have heard in recent discussions with leaders of large and small firms. Higher prices, in turn, will further reduce households’ purchasing power. This should slow the pace of consumption growth, as over time fewer households will be able to draw on their savings to help sustain their spending. 11 A slowdown in household spending should also weigh on business revenues and keep hiring and capital spending relatively subdued as a result. I expect that the limited hiring and slower economic growth will result in a relatively modest increase in the unemployment rate over the remainder of this year and early next – before activity resumes a more trend-like pace as uncertainty declines and tariffs work their way through the system. But with still-favorable financial conditions, both households and firms should ultimately be able to withstand the tariff shock with only a limited slowdown in near-term economic activity. My Outlook, Risks, and the Policy Implications Overall, my baseline economic outlook is relatively benign. I see continued growth in activity, little further rise in the unemployment rate, and inflation remaining elevated this year and into early 2026 as tariffs are passed through more fully, before resuming its decline. But For example, see, Who Will Pay for Tariffs? Businesses’ Expectations about Costs and Prices - Federal Reserve Bank of Boston 10 Consumption is also likely to slow because many households “front-loaded” durable goods purchases ahead of tariffs. 11 7 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY while that is my baseline view, I do not rule out scenarios featuring higher and more persistent inflation, more adverse labor market developments, or both. The upside risk to inflation cannot be discounted after more than four years of price growth above the FOMC’s 2 percent target. The Committee’s credibility in following through on its price stability mandate is a critical asset – and an erosion in credibility would make achieving price stability even more challenging. Another period of rising inflation could destabilize inflation expectations and lead to higher expected price increases going forward. At the moment, most measures of both short- and longer-term inflation expectations remain relatively stable, as shown in Figure 6. Furthermore, a softer labor market with strong productivity growth reduces the risk of inflationary pressures from wage growth. But all of this warrants careful attention, and a lack of comprehensive price data (given the government shutdown) will complicate assessing the inflation environment. While I see inflation risks as somewhat more contained than I previously thought, downside risks to the labor market have likely risen. As noted earlier, the labor market has cooled to a curious balance with little hiring or firing and still low unemployment. But further softening would generate unwelcome slack, leaving the economy more vulnerable to adverse shocks and possibly triggering more unfavorable dynamics. Moreover, while larger firms have generally been able to increase productivity and weather the uncertain economic environment so far, it is less clear that this has been the case for their smaller counterparts. Indeed, productivity gains for non-financial, non-corporate businesses, which account for roughly 16 percent of GDP and employment , appear to have been more limited. Some of these smaller firms may be under more duress, which could weigh on employment and economic growth going forward. As I noted at the outset, determining appropriate monetary policy in the current uncertain environment with competing risks is challenging. However, with inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market. Importantly, even with some additional easing, monetary policy would remain mildly restrictive, which is appropriate for ensuring that inflation resumes its decline once tariff effects filter through the economy. But policy is not on a pre-set path, and I can envision scenarios where appropriate policy calls for holding rates steady later this year and into next, as we assess effects of the recent 8 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY policy actions and get more information. Going forward, my policy decisions will continue to be guided by my best assessment of all available data, their implications for the outlook, and the evolving risks. On the Regional Economy and Final Thoughts I’ll turn briefly now to something else we consider essential to responsible policymaking. My final slide highlights the Boston Fed’s engagement across our region and to the breadth of our efforts. As I mentioned at the outset, it’s vital to complement quantitative data analysis with outreach to people on the front lines of the economy, in all kinds of places: rural, urban, suburban; thriving, or struggling. So, I spend time with a wide range of stakeholders in the economy, in Greater Boston and across all six states of New England. I learn about their economic challenges and opportunities, and their expectations for the future – including business conditions, costs and prices, job prospects, access to credit and financial services, and more. This underlines the wisdom of the U.S. central bank’s framing more than 112 years ago as a federated system – with components spread throughout the country, as well as in the nation’s capital and the “financial capital” of New York. I, like my fellow reserve bank presidents, bring those insights, and my team’s rigorous analysis, to the policymaking table in Washington. The federated U.S. monetary policymaking structure befits our expansive, varied country filled with such a range of people, industries, and places. I’ll share just a tiny bit of what I’ve heard about in this region that we all care about and want to see thrive, now and for years to come. In terms of challenges, I’ve already mentioned difficulties related to heightened uncertainty. It won’t surprise you that the list includes housing supply and affordability, as well as scarcity of services like childcare that inhibit people from participating in the labor market and economy. I’ve also heard of increased difficulties to maintaining the region’s cutting-edge technology, science, and healthcare “ecosystem.” While many of those challenges are the purview of fiscal policymakers, our commitment, at the Boston Fed, to a vibrant economy that works for all leads us to contribute to progress as objective researchers and, at times, as “conveners.” 9 Remarks as Prepared for Delivery EMBARGOED UNTIL 3:45 P.M. U.S. Eastern Time, Tuesday, October 14, 2025 – OR UPON DELIVERY I’ve also heard about and seen many creative, cross-sector initiatives that are enhancing economic vibrancy. For instance, Cape Cod Community College and partners have helped create the largest aircraft-mechanical technology training program in the country – a win-win for all. Civic and community partners in Springfield, Massachusetts have supported resident entrepreneurs in opening childcare businesses, helping to meet a desperate need. And I’ve seen countless examples of business innovation building on the legacy strengths of New England – whether Maine lobstermen farming kelp in the off season; or constant innovation at Velcro, built upon Manchester, New Hampshire’s rich history of fabric production. I could give many more examples of challenges and of opportunities. So often the business community and bankers are playing key roles in these economy-building initiatives, partnering with labor and nonprofits and local governments. Greater Boston is special, and so is its business community. Thank you for all that you are doing to support economic vibrancy. I look forward to continued engagement, collaboration, and innovation. And now I look forward to Kim’s questions. Thank you! 10