MNI POLICY: Fed's Rosengren Flags Risk of Inflation Build-Up

By Jean Yung

     WASHINGTON (MNI) - Inflation could accelerate by more than forecasters

currently expect if firms are unwilling to absorb rising wages in a tight labor

market, Boston Federal Reserve Bank President Eric Rosengren warned Monday. 

     Both private forecasters and Fed officials project a positive view for

2020, with growth near potential, inflation returning to the Fed's 2% target and

a strong job market, Rosengren said. But the risk of inflation building more

quickly than it has, as well as low rates pushing investors to chase profits in

the real estate sector, pose risks to this outlook. 

     These potential risks to inflation and financial stability are "somewhat

more concerning" than risks on the downside such as trade disruptions and

slowing global growth, he said in remarks prepared for the Connecticut Business

and Industry Association in Hartford, Conn. 

     Economists have been puzzled by the absence of significant inflation

pressures despite very low unemployment rates, concluding that the Phillips

Curve relationship has weakened. 

     Inflation exceeding projections "could be a good thing" in light of low

rates and little policy space to respond to a recession, Rosengren said, but "we

should acknowledge that there are relatively few cases where the unemployment

rate and the Fed's policy interest rate both remained well below their estimated

long-run values for an extended time." 

     "More rapid than expected inflation remains a risk of running the economy

with accommodative monetary policy and tight labor markets," he said. 

     On the financial stability side, low interest rates in a booming economy

will encourage investors to "reach for yield," taking more risks especially in

the real estate sector to raise their returns, Rosengren warned. 

     Since 2015, housing prices in the U.S. have risen faster than per capita

income and capitalization rates for commercial real estate have fallen. 

     "Financial stability risks could potentially emerge as a problem for the

otherwise benign outlook," he said. 

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

[TOPICS: MMUFE$,M$U$$$]