MNI EXCLUSIVE INTERVIEW: Fed’s Rosengren Backs Quarterly Hikes

–Worried Fed Too Accommod When Infl Hits 2% By End-2018, Unempl Under 4%
–Would Reconsider View If Infl Consistently Misses; Too Soon To Tell
–Stocks Not Quite ‘Ebullient’ But Shock Could Exacerbate Downturn

BOSTON (MNI) – Having exceeded full employment and with inflationary pressures on the rise, the Federal Reserve should move its benchmark interest rate higher every quarter to move away from its quite accommodative stance, Boston Federal Reserve Bank President Eric Rosengren told MNI in an exclusive interview Saturday.

Steady wage gains over the past two years reflect the tightening in the U.S. labor market and Rosengren said he expects to see the pressures on resource utilization manifested in prices over the next year or two. With both Fed and private economists forecasting inflation to reach 2% by the end of 2018, “we’d be worried that you could see an unemployment rate that gets below 4%” as the economy gathers momentum, he said.

“Some accommodation is probably warranted until we’re more confident that inflation is going to be at 2%, but once you’re confident that inflation is going to be at 2% and you’re already below full employment, then you don’t necessarily need to have particularly accommodative monetary policy,” Rosengren said.

So, “One (rate increase) every quarter seems pretty reasonable unless inflation data ends up being weaker than I’m anticipating,” he said. Rosengren is a nonvoting member of the Federal Open Market Committee this year.

The Boston Fed chief, who in the aftermath of the financial crisis was widely perceived as a policy dove, has in recent months staked out more hawkish views. But he said Saturday that unlike some of his colleagues, he’s more skeptical about questioning the old law of supply and demand for labor.

Alternative theories, such as whether globalization has fundamentally altered the inflation process, are “worth thinking about,” Rosengren said. But “If we weren’t seeing wages going up, I’d be more concerned about whether the misses we’ve been having recently is an indication of something more significant,” he said.

In his view, wages have trended higher since 2015 and will continue to do so. The pace of wage gains — now around 2.5% annually — may be less than what people might expect given increases of 3.5% to 4% in past cycles, but productivity and inflation are also lower today, he said.

“If your inflation is a little less than 2% and productivity is less than 2%, then you should be getting a number lower than what we’ve historically seen,” he said.

Advances in the employment cost index and average hourly earnings are “an indication we’re starting to see that tightness in the labor market appear in wages,” Rosengren said. “We haven’t seen it appear in prices yet but my expectation is we’ll see it over the next year or two a little more clearly than we have to date.”

The shortfall in inflation this year Rosengren attributes to one-off price adjustments including the rollout of unlimited cell phone service plans and lower pharmaceutical pricing and said it will take a year before those observations drop out.

Much like how Fed officials should not overreact to a spike in gas prices after hurricanes barreled through Texas and Florida this summer, “I don’t think we should be overly responsive to temporary price changes that go the other way,” Rosengren said.

He worries more about a situation by the end of 2018 where “we’re pretty close to 2% inflation and labor markets are even tighter than they are now,” yet rates are still accommodative. The FOMC projects the fed funds rate to be 2.1% by the end of next year, below a neutral rate of 2.75%.

“If we keep missing on inflation and if wages and salaries plateau or go down, I would have to rethink some of this,” he said. But, “I don’t think we’ve had enough data at this point.”

Another way inflationary pressures could pop up is in asset prices, Rosengren said. He has been outspoken in warning that current easy financial conditions could pose risks to financial stability especially in the event of a downturn.

While many Fed officials see accommodative financial conditions as helping to bolster the economic expansion, Rosengren said he’s concerned “in some areas of the market you could have asset prices that become unsustainable, that if we were to have a bad shock that those would amplify the economic downturn when it did occur.”

Calling stocks “fully priced” if not quite “ebullient,” Rosengren said the Fed should look at asset prices and ask, “Can we explain it with underlying fundamentals?” Right now, “I don’t know if it’s quite to the ebullient point but I think it’s certainly fully priced,” he said.

Rethinking the Fed’s monetary policy framework could be useful in that sense, he said. Alternative frameworks such as temporary price level targeting could “give us a little more cushion in case we have a negative shock,” though he would not make any change to the Fed’s operating principles now.

With productivity growth sluggish and the equilibrium interest rate low, historically speaking, “if we get a shock that causes a recession we’d hit the zero lower bound,” Rosengren said. Price level targeting would allow the Fed to make up some of the times when inflation has missed and give policymakers a little more space to act during a recession.

“I think we should always be asking ourselves are we using the appropriate framework. But I’m not sure I would pick this particular point in time to make that change,” Rosengren said.

He additionally endorsed the post-crisis floor system the Fed uses to change short-term interest rates while maintaining an abundant supply of excess reserves, saying it’s a “much easier framework to use if interest rates get back down to zero.”

A floor system would necessitate a larger balance sheet over the long run.

But Rosengren noted the FOMC is still far enough away from having to discuss the ultimate size of the balance sheet that it need not make an imminent decision.

Besides, he’s waiting for clarity on who President Donald Trump will appoint to lead the Fed as well as to fill the three openings on the Board of Governors in Washington.

“You can easily imagine the next chair could have the exact same view or a different view” on the balance sheet, he said. “So I think we just need to wait and see who that person is.”

Source: MNI

MONDAY, OCTOBER 16, 2017 – 00:01

–MNI Washington Bureau; +1 202-371-2121; email:

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