Rosengren Says Fed Needs More Time to Weigh Trade War Impact

(Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said it’s too early to tell whether the escalating trade war and the resulting financial market reaction will last long enough to hurt the U.S. economy and alter monetary policy.

“It’s a little premature to think about the outlook” for the economy, Rosengren said in an interview Monday in Boston. “This is a temporary tax increase on imported goods, the full impact of which occurs on June 1. We don’t even know if there’ll be an agreement between now and the end of this month.”

U.S. stocks and commodities tumbled Monday after China retaliated with higher tariffs on a range of American goods in response to the U.S. last week slapping punitive levies on $200 billion of Chinese imports.

Rosengren acknowledged that if new tariffs persist they could eventually weigh on growth and contribute to higher inflation. Not only would prices on many imported goods rise, but companies competing with those goods might take advantage of the situation to raise their own prices, he said. Many firms producing goods in the U.S. are already under pressure to increase prices because of rising wages amid the lowest levels for unemployment in almost 50 years.

“This potentially has some persistence particularly in a tight labor market where the ability to be raising prices in this environment may be greater than in an environment where we have a lot more slack in the labor market,” he said.

Fed Review

Rosengren also discussed the Fed’s ongoing review of its monetary policy framework, which was prompted by worries over the long-term trend of inflation running below the Fed’s 2% objective. Some officials have proposed adopting a so-called make-up strategy that would deliberately aim for above-target inflation for a period following a persistent under-shoot.

“We’ve made a promise to look at things, not to change things,” Rosengren said. “We may change things if the benefits outweigh the costs.’’

For the Fed to adopt a new strategy it would require “fairly strong evidence that it makes sense,” he said.

Rosengren emphasized the Fed had made significant changes to its policy framework in the past, for instance by abandoning the practice of targeting certain measures of aggregate money supply. The difference this time is that the central bank is conducting a more deliberate and open process as it considers the options.

“We shouldn’t assume there’s going to be a change. Just because you found a problem doesn’t mean you have a cost-effective solution,” he said. “At the some time just because it may not be as easy as you think doesn’t mean you should never make a change.”

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