MNI POLICY: Fed's Rosengren Sees No Need to Alter Policy Now

By Jean Yung

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

said Tuesday that uncertainty over U.S.-China trade relations in light of

otherwise healthy growth and a temporary decline in inflation calls for the Fed

to be patient in raising or lowering short-term interest rates. 

     "I see no clarion call to alter current policy in the near term. I view

current policy as slightly accommodative and likely to be consistent with

inflation returning to the Fed's 2% inflation target over time. This is likely

to occur more rapidly if tariffs are imposed," he said in remarks prepared for

The Economic Club of New York. 

     "Currently most forecasts envision the economy growing somewhat above the

rate considered its 'potential' this year, then slowing to a growth rate

somewhat below potential in subsequent years. And most see the current low

readings on inflation as temporary."  

     Uncertainty over ongoing trade negotiations pose a downside risk to the

U.S. economy. Recently proposed tariffs by Washington and Beijing will tend to

raise import prices, though these effects can be "mitigated by many factors,"

such as how easy it is to find alternatives to goods subject to tariffs, he

said. 

     He added that he was optimistic that both sides will try to reach an

agreement, and that the uncertainty will be "transitory, and thus have only a

modest effect on the forecast for the U.S. economy overall." 

     --INFLATION OVERSHOOT

     Policy should not overreact to temporary inflation misses, but the Fed

might consider aiming for "somewhat above-target inflation during recoveries,

knowing that it will likely underrun its inflation goal in downturns or

recessions," Rosengren said. 

     The Trimmed Mean PCE inflation rate out of the Dallas Fed, which excludes

large but temporary price changes, may provide a better sense of the underlying

inflation trend, Rosengren said. That index is currently 2.0%, at the Fed's

target. 

     However, the average rate of inflation over various time horizons are all

below the Fed's 2% target, which could drag down expectations over the long run.

     Still, with tight labor markets and an upward trend in wages, "I believe

the Fed's current framework and its balanced approach do not provide much

impetus to alter the stance of monetary policy at this time," Rosengren said. 

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

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