Fed's Rosengren Repeats Call for Gradual Interest-Rate Hikes

(Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren stepped up his argument to keep the U.S. central bank on track for additional gradual interest-rate increases, warning against being too sensitive to short-term economic data.

Answering questions from the audience after delivering a speech in Montreal, Rosengren said inflation will probably be “much closer to 2 percent” a few months into 2018 as the impact fades from notable pricing changes for mobile phones and certain pharmaceuticals that have helped keep levels low this year.

Inflation expectations in the U.S. are “well anchored,” he said, with wages ticking up but growth still subdued given a jobless rate that fell in September to 4.2 percent, a 16-year low.

“It’s still not the level that I would expect it to be, but we’re definitely seeing that tighter labor markets are causing wages and salaries to gradually go up as well,” Rosengren said at a conference of the International Atlantic Economic Society.

The long-time Boston Fed chief, who’s not a voter on the rate-setting Federal Open Market Committee this year, argued in his published remarks for the “continued gradual removal of monetary policy accommodation.”

Weighing into the debate over weak inflation and its implications for monetary policy, Rosengren, 60, cautioned his colleagues against concluding that surprisingly slow price rises, despite falling unemployment, signaled fundamental and lasting changes in the U.S. economy.

Labor Markets

“Low inflation readings have provided monetary policy makers the opportunity to take a more patient approach to removing accommodation than in recent recoveries,” he said. However, “failing to respond to very tight labor markets with rates remaining negative in real terms could potentially risk unnecessarily shortening the economic recovery.”

Some Fed policy makers, including Governor Lael Brainard, contend that the central bank should be cautious about tightening policy until they are more confident that inflation will bounce back toward the Fed’s 2 percent target.

“Policy makers tend to place too much weight on short-term fluctuations in their real-time estimates of long-run concepts,” Rosengren said in the speech entitled “Estimating Key Economic Variables: The Policy Implications.” “One can make significant policy mistakes if one assumes incorrectly that significant changes in long-run variables have occurred, when in fact no change has occurred.”

Even with the jobless rate falling, the Fed’s preferred inflation gauge ticked up only 1.4 percent in the 12 months through August, and has been under the Fed’s goal for most of the last five years. Chair Janet Yellen called inflation in 2017 a “mystery” at a Sept. 20 press conference in Washington.

“With all the hurricanes that have been hitting the United States, there’s some uncertainty about whether that number is a good number,” Rosengren said of Friday’s decline in monthly employment. “But I would say that we’re expecting GDP growth to be faster than potential.”

To contact the reporters on this story: Sandrine Rastello in Montreal at srastello@bloomberg.net, Christopher Condon in Washington at ccondon4@bloomberg.net.

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Ros Krasny, Bernard Kohn