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Boston Fed's Rosengren Sees December Rate Increase Likely

16 Oct 2017 4:01 am
By Michael S. Derby 

BOSTON -- Federal Reserve Bank of Boston President Eric Rosengren said in an interview Friday the U.S. central bank remains on track for a likely rate rise at the end of the year, as the institution seeks to keep the economy on a balanced path of growth.

If the economy performs as expected, "December seems like a reasonable time" to implement another rate rise, Mr. Rosengren said. An increase then would be "quite consistent with my own view," which forecasts "a labor market that's tight and inflation pressures, wage pressures that are starting to pick up."

Mr. Rosengren, who was interviewed on the sidelines of a conference at his bank on the merits of monetary-policy rules, has been for some time a steadfast supporter of boosting short-term interest rates in a bid to keep the economic expansion moving forward.

Mr. Rosengren isn't currently a voting member of the interest-rate setting Federal Open Market Committee. But he remains an influential voice as officials debate the merits of delivering a third 2017 rate rise for what is now a short-term target-rate range of 1% to 1.25%. While the job market remains strong, inflation has been consistently weaker than expected relative to the Fed's official target of a 2% increase. That has led some to argue the Fed should hold off on rate increases.

Mr. Rosengren has countered that factors pushing inflation down now are temporary. He believes that the long-running relationship wherein a strong job market generates inflation pressure still holds. With unemployment very low, he reckons higher price pressures are very likely to follow, and that means higher rates are needed.

"A failure to tighten would risk both the labor market and financial prices getting into an area where we would have to react more quickly, and that would increase the probability that we end up having a recession," Mr. Rosengren said. Moving slowly now most likely means being able to avoid taking more dramatic action later, he said.

The official also explained that, by his estimate, the unemployment rate has just settled into the zone where it should start spurring higher inflation pressures. Mr. Rosengren thinks there is little chance Fed rate rises right now will cause an adverse economic reaction.

"If we're doing it very slowly, there's plenty of time for us to adjust the interest rate if all of a sudden the economy weakens," he explained.

Mr. Rosengren also explained in the interview that a large part of the easing in financial conditions seen lately doesn't worry him.

Financial conditions -- stock market levels, the dollar's value, long-term borrowing costs -- have grown easier even as the Fed has moved forward with four rate increases since the end of 2015. Normally, these conditions would grow more restrictive in response to higher short-term rates.

Mr. Rosengren explained the relative easiness of financial conditions owes to the differing economic- and monetary-policy relationships between the U.S. and other major economies.

"If we continue to tighten over the next two years, and financial conditions were easier at the end of the two years, that would surprise me a lot," he said. "I don't anticipate that would be true, but we'll see."

Mr. Rosengren reiterated long-held concerns that the commercial real-estate market remains frothy and a potential vector to amplify a shock to the economy through its impact on the banking sector. More broadly, "I continue to be worried about there being overstretched valuations in some sectors of the market. It's not enough that I think we should be taking a lot of action," however.

Mr. Rosengren also commented on the continuing drama around the selection of a new leader for the Federal Reserve. While Chairwoman Janet Yellen might be reappointed, some of the other contenders for job, such as one-time governor Kevin Warsh or Stanford University professor John Taylor, have been regular critics of Fed policies. They are presumed to want a more aggressive path for interest-rate increases. There are also a number of open governor positions for the Trump administration to fill, which could also change the Fed's outlook.

Mr. Rosengren noted that new officials wouldn't be able to push the Fed around on their own.

"We have to come to a committee consensus. Chairmen do make a difference, but they have to be able to convince enough of the voters to go along with whatever the decision is," Mr. Rosengren said.

"I would assume that whoever becomes chair will take into consideration what the likelihood is of being able to get enough votes to pass their policy," which suggest there is unlikely to be a radical shift in Fed policy, Mr. Rosengren said.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

October 16, 2017 00:01 ET (04:01 GMT)

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