Exploring the Economy’s Progress and Outlook
South Shore Chamber of Commerce, Quincy, Massachusetts
Speaking to a local chamber of commerce, Boston Fed President Eric Rosengren said that to ensure the U.S. economy remains at the full employment level it is now approaching, gradual tightening of monetary policy is likely to be appropriate.
He added that "a failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery."
The U.S. economy has remained "fairly resilient" despite headwinds from abroad, Rosengren said, pointing to the gradual tightening of labor markets and inflation slowly returning to the Fed's 2 percent inflation target.
"My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy," he said.
Rosengren noted that there have been some conflicting signals in the economic data over the summer. Payroll employment has been quite strong, he said, averaging just over 200,000 net new jobs per month over the past year.
In contrast, Rosengren called real GDP growth for the first two quarters "disappointing" but observed that at least part of this weakness reflects temporary inventory adjustments that are likely to be reversed.
"I expect some continuing drag from foreign activity," Rosengren added. "But underlying domestic strength is likely to be sufficient to engender continued improvement."
Looking forward, Rosengren said that most forecasters expect that labor markets will continue to tighten and the unemployment rate will continue to fall.
Commenting on risks to the outlook, Rosengren noted the presence of global concerns but said that "market indicators have so far provided little evidence of outsized risks."
However, Rosengren cautioned that an overheated economy – one that significantly exceeds sustainable output and employment – would pose risks to maintaining full employment over time.
History shows the difficulty of slowing the economy to a sustainable rate without going too far and causing a recession.
Rosengren noted that waiting too long to tighten could lead to conditions that require more rapid increases, risking a more pronounced slowing of growth and rise in unemployment. It may also allow some asset markets to "become too ebullient," and he reiterated previous concerns over commercial real estate prices.
"The risks to the forecast are becoming increasingly two-sided, in my view," Rosengren explained. "Weakness emanating from abroad poses short-term downside risks to the domestic U.S. economy," yet there are also "longer-term risks from significantly overshooting the U.S. economy's growth."