Fed's Rosengren Favors Hiking Until Rates ‘Mildly Restrictive’

(Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said the U.S. central bank should keep raising its benchmark interest rate until it’s reached “mildly restrictive” territory.

With a strong labor market expected to become tighter, he said, economic imbalances, including inflationary pressures, will continue to mount.

“Federal Reserve policy makers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance,” Rosengren said Monday in the text of a speech at an economic conference in Boston. Such a policy “is fully consistent with a forecast of GDP growth above potential that leads to further tightening of labor markets, and inflation mildly overshooting the Federal Reserve’s 2 percent target.”

Rosengren spoke less than a week after the Fed’s policy-making Federal Open Market Committee increased rates by a quarter percentage point for a third time this year and released new forecasts projecting four more hikes by the end of 2019. The new projections also foresee the federal funds rate reaching about 3.4 percent by the end of 2020. That’s above most Fed estimates for the neutral level that neither lifts nor holds back the economy.

Gradual Path

Rosengren, who will vote on the FOMC in 2019, made clear he wasn’t advocating a more aggressive pace of hiking.

“Continuing to raise short-term rates gradually, until monetary policy becomes mildly restrictive, is likely to be appropriate and beneficial over the long term,” he said.

Rosengren identified a number of other risks to the U.S. economy, including a strengthening dollar, emerging-market turmoil and the fallout from the escalating trade war with China. Still, he saw the most likely outcome as a labor market that keeps strengthening, leading to “economic imbalances” including inflation pressures.

In addition to denting growth, tit-for-tat tariffs between the U.S. and China could feed inflation by giving firms “cover” to pass on rising labor costs to customers.

“Many of our business contacts in New England have highlighted that they now receive little resistance to passing on price increases,” he said. “These anecdotes may reflect an unintended consequence of the tariffs: suppliers may now feel they have more pricing flexibility, posing an upside risk to measured inflation.”

To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods, Scott Lanman

©2018 Bloomberg L.P.