MNI POLICY: Fed Rosengren Calls For 'Mildly Restrictive' Rates

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Boston President Eric Rosengren

on Monday repeated his call for the central bank to raise interest rates

gradually to a "mildly restrictive stance" over the next few years despite

recognizing "clear signs of rising risk" from abroad. 

     Newly-announced tariffs imposed by both the United States and China

heighten concerns that trade restrictions could hurt the two economies, while

stress in emerging markets and in the European banking system could threaten

global growth. 

     Assuming the potential global risks do not materialize, "I believe that

continuing to raise short-term rates gradually, until monetary policy becomes

mildly restrictive, is likely to be appropriate and beneficial over the long

term," Rosengren said. 

     The Fed last week raised interest rates by another quarter point to a

target range of 2% to 2.25% and projected that rates would rise to 3.4% by 2021,

nearly a half point higher than their estimated neutral rate of 3%. 

     The U.S. economy continues to sustain strong growth momentum, he said. That

is likely to lead to further tightening in the labor market and the "likely

buildup of economic imbalances, including, but not limited to, inflationary

pressures," he said.  

     Inflation has been well contained to date and analysts expect it to remain

just above 2% this year and next. But "I personally believe there are some

upside risks to this outlook," Rosengren said. 

     Running the economy too hot risks stoking inflation and upsetting financial

system stability, either of which could call for a "forceful" response by the

Fed to raise interest rates rapidly. 

     "The history of rapid rate increases in the U.S. suggests that such a risk

is real," Rosengren said. 

     Therefore, "I believe that continuing to raise short-term rates gradually,

until monetary policy becomes mildly restrictive, is likely to be appropriate

and beneficial over the long term." 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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