Exploring the Economy's Progress and Outlook
Boston Fed President Eric Rosengren said it will be appropriate to continue the gradual normalization of interest rates if incoming economic data continue to be consistent with improvement in labor markets and inflation getting closer to the Federal Reserve's 2 percent target. He was speaking to the Greater Concord Chamber of Commerce, in New Hampshire.
Referring to April's employment report, Rosengren said that while it was a bit below market expectations, it still reflected relatively strong employment growth at a time when the U.S. economy is close to what most economists consider full employment. Should April's payroll employment growth continue, it “should be strong enough to bring some further tightening of labor markets," he added.
Rosengren also acknowledged diminished headwinds from abroad, and a tentative upward trend in average hourly earnings.
He reiterated his earlier perspectives – that the market remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets.
Rosengren also acknowledged the benefits of probing the natural rate of unemployment to see how low it might be, given the benefit to workers. “We have seen workers rejoin the labor force, many of them previously having given up looking for work."
However, Rosengren continued, there can be potential costs to accommodation if rates stay too low for too long, potentially encouraging speculative behavior.
The commercial real estate market is one area where Rosengren has particular concern, noting that prices now exceed the peaks reached prior to the financial crisis, and growth in mortgage debt on multifamily properties is up sharply from lows reached in 2010.
“History shows that most periods of serious financial instability involve a scenario in which debt is high relative to a volatile underlying asset, and the value of the asset subsequently declines," Rosengren said. He cited the scenario that played out in New England in the late 1980s and early 1990s, and said “it is important that we take actions early enough to avoid a repetition of that experience."
Rosengren also noted the limits in monetary policy's ability to fine tune the economy, saying it has “proven difficult" to calibrate policy so as to gradually increase the unemployment rate, gently nudging it back toward full employment. “The lesson is that policymakers should avoid significantly overshooting their best estimates of the natural rate of unemployment," he said. “Waiting too long to have more normalized rates risks possibly overshooting on the unemployment rate, and needing to tighten more quickly than would be desirable."