Perspectives on the Economy and Fed Policy: Why Continuing to Remove Monetary Accommodation is Appropriate
In remarks Friday, Boston Fed President Eric Rosengren said that economic data "have been quite good," monetary policy remains accommodative, and fiscal policy has just become quite a bit more stimulative."
The unemployment rate, he said, is now below even the lowest estimates by Federal Reserve policymakers for the level that is likely to be sustainable in the longer run.
Turning to inflation, Rosengren said that while it is still a bit below the Federal Open Market Committee's target, most forecasters expect inflation to rise to, or near, that 2 percent target by the end of 2018.
The notable strength of the labor market provides some confidence in hitting the 2 percent inflation target.
Rosengren noted that the number of individuals filing initial claims for unemployment insurance is at low levels not seen since the late 1960s and early 1970s, when the labor force was considerably smaller than it is today.
While a tight labor market provides definite advantages – such as employment opportunities for workers who have struggled to find a job – "providing too much stimulus from either monetary or fiscal policy at this stage of the economic cycle could threaten to create a so-called 'boom and bust' economy," which policymakers certainly want to avoid, said Rosengren.
He also noted that recent volatility in stock and bond markets likely reflects, in part, the realization that financial markets need to factor in the risk that wages and prices could grow too quickly in the event of too much fiscal and monetary stimulus, "particularly with the economy currently at or beyond full employment, and inflation approaching the Fed's goal."
"To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace," Rosengren said, "and perhaps a bit faster than the three, one-quarter point increases envisioned for this year" in the December projection of appropriate policy by Fed officials.
Rosengren said that this expectation assumes, of course, the data continue to come in more-or-less consistent with his outlook.
Rosengren was speaking at the Springfield Regional Chamber Outlook 2018 in Springfield, MA.