MNI INTERVIEW: Fed Should Pause, Assess Two-Way Risk-Rosengren
Ex-Boston Fed chief says a March FOMC rate hike could exacerbate financial problems.
The Federal Reserve should pause interest-rate hikes next week to see how much demand has been shaken by market turmoil, former Boston Fed President Eric Rosengren told MNI, adding time will tell if rate hikes or cuts are appropriate.
"Until we can see how much demand destruction has actually occurred as a result of what's happened in financial markets over the last week, it doesn't make sense to be considering raising rates," he said in an interview. Financial problems present two-way risks to the economy that could eventually force the Fed to cut rates or leave officials on track to hike again, Rosengren said.
"We're going to need several weeks to see if the financial markets stabilize without having significant demand destruction," he said. "If it turns out that they are able to quickly stabilize the situation and that the real economy as a result isn't slowing down significantly, then it's quite possible in the future they'll need to raise rates once again."
"The concern that I would have is that they're underestimating the impact on the real economy."
"If this continues to be amplified over the next week, I think it is quite possible that they're going to have to respond with cuts," said Rosengren, a former top bank supervisor at the Boston Fed. "It's a serious situation."
"We should be concerned when people are losing faith in some very large regional banks around the country and the fact that we're seeing it spillover to Credit Suisse and seeing prices decline, even at the largest banks. It should give us some pause."
Either way the ex-Boston Fed president suggested the collapse of Silicon Valley Bank and Signature Bank may have lowered the Fed's terminal rate. Financial crises tend to create a fair amount of demand destruction, he said, pointing to credit availability and not necessarily the cost of credit.
"Consumers start holding off on large purchases and businesses start to defer spending. What that means is that even though the last inflation number was quite high - and did not look like we were quickly moving towards the 2% inflation target - the financial fragility we're seeing is likely to be the equivalent of a number of federal funds rate hikes," he said.
But the Fed's SEP to be released next week "is not going to be conveying as much information as other times."
"They're going to be some people who are going to assume that the financial fragility we're seeing this week will be resolved quickly" and see rates rising, he said. "Then there's probably a group that are very concerned that financial fragility will substantially weaken the economy and they might actually have interest rates stay flat or even go down."
Still, Fed Governor Michelle Bowman Tuesday said the US banking system remains resilient and on a solid foundation and some former Fed staffers have told MNI that pausing would send a "very bad signal" about compromising on the central bank's inflation objective. (See: MNI INTERVIEW: Fed Likely To Hike 25BPs Next Week- Ex Official)
"It's a myth that you can keep [financial stability issues and monetary policy] separate," Rosengren said. "You're talking about financial problems spilling over into the real economy."
"If the real economy is going to weaken it doesn't matter whether it's weakening because you raised rates, something else exogenous happened, or you have financial fragility. The bottom line is you don't raise rates when the economy looks like it might be significantly weaker in the future."
"I would be very worried that tightening not only would exacerbate the financial problems but potentially if things aren't brought under control relatively quickly this could generate the type of forces that cause recessions," Rosengren said.