Assessing the Economy’s Recent Progress
Portland Regional Chamber of Commerce, Portland, Maine
Speaking in Maine, Boston Fed President Eric Rosengren described how the U.S. economy has continued to gradually improve. He cited October payroll employment growth of 161,000 jobs and the unemployment rate at 4.9 percent as evidence that the economy is at or close to most economists' estimates of "full employment."
As a result, "Absent significant negative economic news over the next month," the market's assessment of the likelihood of monetary policy tightening in December "seems plausible."
To achieve the goal of a continued, sustained economic recovery, Rosengren noted that Fed policymakers must consider the risks inherent in waiting too long to gradually remove monetary accommodation.
"I would much prefer that tightening be gradual, and that policymakers try to avoid circumstances in which we need to tighten more quickly," said Rosengren. "My concern is that more rapid tightening, were it necessary, could risk disrupting the recovery" that is now attaining full employment and price stability.
Growth forecasts imply that we are likely to see some further tightening in labor markets. Rosengren noted that since the unemployment rate is already close to its full employment level, further declines would increase the risk of overshooting what is likely to be a sustainable unemployment rate in the longer run. That outcome, he said, could lead at some point to the need for a more rapid removal of monetary policy accommodation.
"It is certainly good news that the labor force has grown more rapidly of late, and that workers have been drawn from out of the labor force into employment. But this trend is likely to be limited going forward by the demographic changes in the workforce" and the result could be overshooting.
Turning to inflation, Rosengren said at last it appears to be trending toward the Federal Reserve's 2 percent goal. The Boston Fed forecast expects both the total and core PCE inflation measures to hit 2 percent over the next year. Progress to date and the expectation of further progress likely explain why markets have priced in a high probability of a rate hike in December.
Acknowledging his September vote to increase interest rates, Rosengren said that he felt that at the November FOMC meeting that the changes in the FOMC statement were well aligned with the notion (and the market perception) of a high likelihood of tightening in December.
"Going forward, I will be attuned to assessing whether my forecast – continued progress toward achieving our inflation target and employment goals – is on track."
Rosengren was speaking to the Portland Regional Chamber of Commerce in Portland, ME.