Exploring Current Economic Conditions and the Implications for Monetary Policy
Boston Fed President Eric Rosengren expects economic growth to be strong enough in the second half of the year to further push down the low, 3.9 percent U.S. unemployment rate.
Despite risks from abroad, Rosengren believes “the most likely outcome will be a U.S. labor market that continues to tighten and the likely buildup of economic imbalances, including, but not limited to, inflationary pressures.”
Pushing the economy too hard, Rosengren said, risks inflationary concerns or financial-stability risks. Either of these outcomes might necessitate a more forceful monetary policy response by the Fed, putting at risk the continued expansion.
“The history of rapid rate increases in the U.S. suggests that such a risk is real, and as a result my preference for a strategy that allows a continued, but gradual, pace of monetary tightening,” he said.
Rosengren considered a number of global risks, including tariffs, problems in emerging markets, and a potentially disruptive Brexit. “If they do not materialize and disrupt strong U.S. GDP growth, I believe that continuing to raise short-term rates gradually, until monetary policy becomes mildly restrictive, is likely to be appropriate and beneficial over the long term.”
Examining the data on the labor market’s tightness, Rosengren suggest that the forecast of an unemployment rate “well below” its estimated long-run sustainable level for a significant period of time is a sign of a macroeconomic imbalance that “poses a risk of rising inflation or increasing financial stability concerns — or both.”
“I believe that Federal Reserve policymakers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance in order to best fulfil our mandate — stable prices and maximum sustainable growth.”
Rosengren was speaking at the National Association for Business Economics (NABE) 60th Annual Meeting in Boston, MA.