Rosengren Calls for Fed to Tighten at Every Other FOMC Meeting

(Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said the central bank should be prepared to raise interest rates a total of four times in 2017 to guard against overheating the U.S. economy.

The policy-making Federal Open Market Committee should be ready to move again in June, September and December, unless incoming data push them off course, he said.

“The perception seems to be that the outcome of each FOMC meeting depends on nuances of incoming data, with the base case being no change in rates,” Rosengren said in a speech in Boston Wednesday. “My own view is that an increase at every other FOMC meeting over the course of this year could and should be the committee’s default.”

Rosengren, once a strong advocate for keeping rates lower for longer, is reprising the role he took up in late 2016 of pushing his colleagues to consider a slightly quicker path for tightening monetary policy as the Fed nears its goals on unemployment and inflation.

Fed officials raised their benchmark lending rate by a quarter percentage point on March 15 and stuck to projections for three total hikes this year. Rosengren was among five FOMC members, out of 17, who indicated that four or more hikes this year would be appropriate.

Excess Stimulus

Like he did last year, Rosengren warned that moving too slowly may allow unemployment to undershoot its lowest sustainable level by too much, putting pressure on inflation and creating other points of financial instability.

Unemployment is likely to go below 4.4 percent by 2018 according to many economists, Rosengren said, a level that no FOMC member considers sustainable. The Fed’s preferred measure of inflation was 1.9 percent in the 12 months through January. Many forecasters, Rosengren said, expect that to rise above 2.2 percent by the end of this year, exceeding the Fed’s 2 percent target.

“It is important to avoid creating an over-hot economy that could require a more rapid tightening of monetary policy -– which would place at risk the economic improvements seen to date,” he said.

Speaking in Frankfurt earlier Tuesday, Chicago Fed President Charles Evans said the central bank wants “to be very clear about what our intentions are” on how it will shrink its $4.5 trillion balance sheet, but policy makers hadn’t decided yet when that process would begin.

The FOMC began discussing the topic at its March meeting.