One Policymaker's Wait for Better Economic Data
Boston Fed President Eric Rosengren said on Monday that the economy has been softer than many forecasters expected in the first half of this year. Over the past three quarters, real GDP growth has been disappointing. And forecasts have tended to be too optimistic. While a severe winter deterred some economic activity, the data "were also weak before the storms and have been weaker than expected ever since."
Also, there has not been a "snapback" in the numbers since the weather improved. And retail sales do not show large variations by region, while only some regions had severe winter weather. Also, the personal saving rate has remained well above where it was prior to the Great Recession.
"If consumer behavior is still being impacted by the experience of the financial crisis, the Great Recession, and the painfully slow recovery, then it is possible that the economy will not be as robust as many economic models would suggest, because the models do not take into account this behavioral change." Exploring the implications for Fed policy, Rosengren said the data demonstrate why "the conditions for beginning the tightening of monetary policy have not yet been met."
In each of the previous tightening cycles, he observed, real GDP growth in the two years preceding the tightening was above 3 percent. Today we are faced with a growth rate of 2.3 percent over the past two years, and the strong possibility that growth in the first half of this year will average much less than 2 percent. "In my view, such a pace of GDP growth does not meet some of the economic preconditions we look for when we begin a tightening cycle."
Noting that the Federal Reserve's dual mandate from Congress is focused on stable prices and maximum sustainable employment, Rosengren said that measures of inflation are not yet showing much evidence of returning to the 2 percent target that the Fed considers ideal. "If the economy continues to grow at the same pace as we witnessed on average in the current and the past two quarters, I do not expect to see timely improvements in the unemployment rate and sufficient progress towards the 2 percent inflation target. This, in my view, makes a compelling argument for continued patience in monetary policy."