Prospects for Returning to More Conventional Monetary Policy
Colby College, Waterville, Maine
In a speech today in Maine, Boston Fed President Eric Rosengren discussed a return to the Federal Reserve's 2 percent target level for inflation, and the implications for normalizing monetary policy.
Recent global events may make it less likely that the inflation target will be achieved as quickly as had been projected in recent forecasts, Rosengren noted.
"In my own view, if inflation is slower to return to target, monetary policy normalization should be unhurried. A more gradual approach is an appropriate response to headwinds from abroad that slow exports, and financial volatility that raises the cost of funds to many firms."
He added that his view could change "if we were to experience a more rapid abatement of headwinds, or much stronger domestic economic growth than I am currently anticipating."
Rosengren touched on recent economic factors, such as the declines to date in energy costs that "are likely to bring about continued temporary downward pressure on core inflation." And he noted the dollar's appreciation, making imported goods cheaper and reducing U.S. inflation as it raises the cost of U.S.-produced goods to foreign buyers.
He added that if inflation expectations change for households and firms, then these temporary downward pressures could pose more permanent impediments. A survey by the New York Fed shows a gradual but clear downward trend in inflation expectations over the past several years. "This suggests we cannot take for granted that regular, persistent, but seemingly temporary shocks to inflation will not have a larger and more lasting impact."
Rosengren also noted that hourly earnings and wages and salaries for private workers have been slowly increasing, and while the increases are more modest than those seen in previous recoveries, the gradual upward trend, were it to continue, would build confidence in reaching the 2 percent inflation target.
However, "If more pronounced global weakness were to materialize and be transmitted to the U.S.," said Rosengren, "I personally believe there would be little need to raise rates until the economy was growing closer to its potential rate."
"Since the Fed published its Summary of Economic Projections in December, we have seen oil prices decline and global stock indices become more volatile – and more generally a lack of inflationary pressures and the presence of global headwinds that make future economic growth somewhat more uncertain," Rosengren said. "Should these conditions persist, and slow progress on attaining the Fed's dual mandate, I believe the normalization of monetary policy should be unhurried, and wait for economic data to improve."
President Rosengren was speaking at Colby College. He is a 1979 graduate of the college, serves on its board of trustees, and will become its board chairman in May of this year.