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--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
By Jean Yung
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
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
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
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
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
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."
--MNI Washington Bureau; +1 202-371-2121; email: firstname.lastname@example.org