Risk Management in Monetary Policymaking
Eric Rosengren, the Boston Fed president, on Tuesday offered up a “relatively strong forecast” for the economy in 2019: growth somewhat above 2 percent, inflation close to the Fed’s 2 percent target, and a labor market that continues to tighten.
However, “risks to that outlook have increased recently,” he said, in a talk focused on assessing and managing those risks.
The fourth quarter of 2018 featured drops in stock indices, rising stock volatility, falling oil prices, dropping long Treasury rates, and widening credit spreads.
But “after the calendar turned to 2019, many financial markets recovered smartly.”
“However, many of the underlying global growth issues that generated the recent spate of financial-market concerns are as yet unresolved,” Rosengren observed. These issues include slowing growth in China and Europe, constraints on international trade, the potential for Brexit-generated challenges, and problems at some European banks.
While there has been some recovery in equity prices, financial markets continue to price in downside risks to the economy. This is most obvious in longer Treasury rates and wider credit spreads, consistent with the ongoing risks posed by slower global growth.
It remains to be seen if signs of economic weakness at the end of 2018 reflect an underlying slowdown, or were a response to “temporary concerns that may fade.”
“There is some risk that more pronounced slowdowns in the rest of the world could dampen U.S. growth more than I am forecasting,” said Rosengren.
While labor markets are tight and wage pressures are rising, inflation is so far quite well behaved. And “earlier concerns that the economy might overheat in a number of ways seem somewhat less pressing at this juncture,” he added.
“Together these factors are sufficient to justify a pause in the recent monetary tightening cycle,” said Rosengren. “In the face of heightened risks, policymakers can be patient,” waiting to better discern the direction of the economy before taking further monetary policy action.
Rosengren was speaking before the National Association of Corporate Directors, New England Chapter, in Boston.