Monetary Policy as the Economy Approaches the Fed’s Dual Mandate
Boston Fed President Eric Rosengren said today that the economy has continued to improve and called for continued gradual removal of monetary policy accommodation.
"Over the next year or two, I expect real GDP to grow somewhat faster than 2 percent, the unemployment rate to continue to gradually decline, and inflation to gradually return to the Federal Reserve's 2 percent target," Rosengren said.
While his forecast envisions a continuation of the economic growth we have seen over the past several years, Rosengren emphasized that the "starting point" is quite different now. "The labor market has significantly improved during the recovery, and my own assessment is that there is very limited slack remaining," he said, showing how the unemployment rate, quits rate, unemployment duration, and participation rate data all support this conclusion. "There is limited room for further tightening in labor markets before one might see more inflationary pressures."
"Importantly, if GDP is growing faster than potential and we reach both elements of the dual mandate, the Federal Reserve risks 'overshooting,' potentially jeopardizing the very significant progress of the U.S. economy since the financial crisis."
In Rosengren's view, it will likely be appropriate to raise short‐term interest rates at least as quickly as suggested by the Fed's policymakers in the current Summary of Economic Projections median forecast, and possibly even a bit more rapidly than that forecast.
Consumption is likely to continue to be relatively robust, reflecting payroll employment, real income growth, and wealth gains over the past several years – and "likely to offset areas of the economy that remain relatively weak," notably exports.
Rosengren cautioned that significant risks to the U.S. economy still exist, particularly from conditions in overseas economies. And he noted that the future stance of U.S. fiscal policy is still unknown. "These areas of uncertainty can materially impact the forecast, and by extension, the path of policymaking that would be consistent with those forecasts."
Rosengren was speaking to the New York Association for Business Economics.