The Economic Outlook – and Two Risks to the Forecast that are Worth Watching The Economic Outlook – and Two Risks to the Forecast that are Worth Watching

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Economic Summit & Outlook

Connecticut Business & Industry Association

4 takeaways from Boston Fed President Eric Rosengren’s Jan. 13 remarks to the Connecticut Business & Industry Association in Hartford, Conn. 4 takeaways from Boston Fed President Eric Rosengren’s Jan. 13 remarks to the Connecticut Business & Industry Association in Hartford, Conn.

  1. Takeaway: As 2020 begins, Fed policymakers anticipate an “almost ideal” economic outcome: inflation returning to target, labor markets remaining strong, and economic growth close to potential. But possible risks to this benign forecast are also worth watching.

    Excerpt: “As a practical matter, central bankers do not have much historical experience with extended periods where interest rates are running below the estimated equilibrium level while unemployment rates are, simultaneously, historically low. So we want to be alert to any potential risks emerging. …If these risks remain contained, my view is we will likely have another year of good economic outcomes.”
  2. Takeaway: One potential risk is that inflationary pressures could build at a faster pace than expected, should labor markets tighten to unsustainable levels. The extent to which we see this inflation risk materialize may depend on how willing or able firms are to absorb rising labor costs, as wages respond to low unemployment.

    Excerpt: “More rapid than expected inflation remains a risk of running the economy with accommodative monetary policy and tight labor markets.” 
  3. Takeaway: Another potential risk is that low interest rates could lead consumers and firms to seek higher returns, or “reach for yield,” by taking on riskier investments. This could increase asset prices to unsustainable levels, which ultimately could threaten financial stability. Given its history, the real estate sector is worth watching closely in this regard.

    Excerpt: “It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for-yield behavior – a scenario that preceded the 1990 and 2007 recessions. In certain scenarios, financial stability risks could potentially emerge as a problem for the otherwise benign forecast.”
  4. Takeaway: Monetary policy is currently accommodative, while forecasts for GDP growth, unemployment, and inflation remain favorable, and stable. So it’s not surprising that the median forecast for interest rates is “no change” for this year and gradual increases over the next two years.

    Excerpt: “Certainly, the lack of inflationary pressure to date has provided one justification for accommodative monetary policy despite the duration of the recovery and a current historically low unemployment rate. However, maintaining interest rates below the consensus longer-run ‘equilibrium’ interest rate is predicated on both inflationary pressures not building up and financial stability concerns being contained.”

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