Current Economic Conditions and the Implications for Monetary Policy
Boston Fed President Eric Rosengren said the economy has shown "remarkable progress" given where it was, and is approaching employment and inflation levels consistent with the Fed's mandate for maximum sustainable employment and price stability.
He was speaking in Hartford, to the Connecticut Business & Industry Association.
Rosengren said that the unemployment rate is at his own estimate of what is likely to be sustainable in the long run, and inflation measures are approaching the Federal Reserve's 2 percent target.
"Without further gradual increases in interest rates, one might be concerned that the unemployment rate could drift below its long‐run sustainable level – and as a result, inflation could eventually exceed the Fed's 2 percent target," Rosengren said.
So in his view "a still gradual but somewhat more regular increase in the federal funds rate will be warranted."
Slow normalization of monetary policy has been appropriate, Rosengren said, given the significant loss of jobs during the Great Recession and the fact that inflation rates both here and abroad that have remained well below the inflation targets set by central banks.
Rosengren acknowledged he has been a "strong advocate" for exceptionally accommodative monetary policy to combat the severity of the recession and the slow recovery. But he called it consistent to see the stance of monetary policy as now needing to adjust, to prevent the economy from dramatically overshooting, "which would place the economic recovery at risk."
"I firmly believe that the aggressive policy actions taken by the Fed during the financial crisis and recession made a huge difference," Rosengren said. "Our economy would not be as healthy as it is and we would thus not be near a tightening cycle now if we hadn't been so aggressive then."
Rosengren noted that the U.S. is closer to achieving its goals for monetary policy than are most other developed countries.
Exploring labor market data, Rosengren showed that conditions "are continuing to tighten." Wages have been increasing, consistent with strong labor market demand.
Regarding inflation, Rosengren's own forecast is that both total and core PCE inflation rates will reach the Federal Reserve's 2 percent target for total PCE inflation by the end of 2017.
"Looking ahead, I see the Federal Reserve as likely to continue to gradually normalize U.S. monetary policy."