Fed's Rosengren digs in over warning U.S. economy may overheat

Friday , April 13, 2018 - 1:16 PM

Christopher Condon

(c) 2018, Bloomberg.

Federal Reserve Bank of Boston President Eric Rosengren doesn’t buy the argument that the U.S. economy’s benign mix of low unemployment and low inflation will continue, and worries the central bank may be too slow in raising interest rates.

“We have to be vigilant to make sure we’re not overstimulating the economy and generating either wage and price increases that are faster than what we’re going to want in the long run, or financial stability concerns,” Rosengren said in an interview on Friday in Boston.

Rosengren, a veteran policymaker who advocated for ultra-easy monetary policy during the financial crisis before switching to a more hawkish tack in 2016, hopes forecasts laid out by his colleagues in March come true. They see economic growth in 2018 of 2.7 percent, joblessness ending the year at 3.8 percent and inflation at 1.9 percent. But he’s not betting on it.

“If you end up with an unemployment rate that’s really low and ebullient markets that have to be offset at some point, and cause a recession, then I’ll feel vindicated,” said Rosengren, who will vote on policy in 2019.

Currently the longest-serving member of the policy-making Federal Open Market Committee, Rosengren, 60, is slowly adding urgency to his argument for a slightly quicker path of rate hikes than projected by the panel as a whole. The median projection of officials called for two additional increases this year on top of the rate hike announced at their March meeting.

“The one thing I want to make sure we don’t do is cause a recession that causes the unemployment rate to go way up,” he said.

The lack of a sharper move upward in wages -- the Fed’s favored gauge of inflation has remained below its 2 percent target -- has caused other policy makers to lower their view on how far unemployment could fall without provoking higher inflation.

Rosengren, by contrast, has left his estimate steady at around 4.7 percent, he said, warning that economists have a track record of getting it wrong when they shift their call.

“We tend to move that a little too much,” he said. “We should see some changes over time, but we shouldn’t see dramatic changes tied to the business cycle.”

He said businesses have responded so far to a tightening labor market by increasing benefits and giving workers more flexibility. In other words, they’ve tried to attract and retain workers with everything but wage increases. But their ability to do that will erode as job growth continues.

“Eventually it will translate into wages as well,” he said.

With the jobless rate running at an unsustainably low level, the Fed will eventually not only have to take its foot off the gas pedal, but tap the brakes on the economy.

“At some point you have to get the unemployment rate back to the sustainable rate,” he said. “That would imply a tighter policy than what you think is necessary to keep inflation and the unemployment rate level.”

The FOMC’s current median estimate for where its benchmark rate would hit that equilibrium is 2.9 percent.

Rosengren has also warned about rising risks connected to financial stability, and signaled some wariness over proposed regulatory changes recently backed by the Fed’s Board of Governors in Washington that would change capital requirements and leverage limits for some banks.

“These are big, complex proposals, so it’s not just up or down,” he said. “There are some benefits to both of these proposals, but in the aggregate we need to be sure we’re not reducing capital for systemic institutions.”

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