Fed's Rosengren Sees Slower Growth But Bullish on U.S. Consumer

(Bloomberg) --

Eric Rosengren isn’t jumping on the interest-rate-cutting bandwagon just yet.

The president of the Federal Reserve Bank of Boston, who’s dissented twice this year when his colleagues voted to lower the central bank’s benchmark rate, made clear in a weekend interview he still thinks the U.S. economy is doing just fine, even after a week of soft data. He’s downgraded his growth forecast for 2019 to 1.7% from 2%, but not his policy prescription.

“If the economy grows at 1.7%, consumption continues to be strong, inflation is gradually going up and the unemployment rate is at 3.5%, I would not see a need for additional accommodation” at the Fed’s October or December policy meetings, Rosengren said Saturday on the sidelines of a conference he hosted at the Boston Fed.

He acknowledged that closely-watched economic reports on manufacturing, services and payrolls came in weaker last week than he anticipated. But the labor market remains tight, he said, and he’s confident the U.S. consumer will continue to drive growth.

Payrolls Numbers

The week ended with a mixed September jobs report. Employers added 136,000 new positions, lower than economists expected, but the unemployment rate dipped to a half-century low of 3.5%.

Rosengren said it’s unclear whether the payrolls numbers are slowing simply because the labor market is already tight, or because sectors like manufacturing and exports are getting hit harder than expected by ongoing trade disputes and slowing global growth.

Overall, however, “the economy is right where we want it to be” with unemployment low and inflation, while below target, creeping back to toward the Fed’s 2% objective.

Investors aren’t quite as satisfied, and many expect the Fed to provide more insurance against a steeper downturn when officials gather in Washington Oct. 29-30. Pricing in fed funds futures contracts imply a greater than 70% chance of another quarter-point cut at that meeting.

Rosengren says the one factor that may change his outlook is the U.S. consumer, who could pull back on spending if the stock market were to drop sharply, or if gloomy headlines over trade and geopolitical tensions mount.

Balance Sheet

“We don’t have a great understanding of the behavioral aspects of consumption, so that’s why we have to monitor it closely,” he said.

The Boston Fed chief, the longest-serving current member of the Federal Open Market Committee, said he would support a policy of expanding the Fed’s balance sheet as a “technical adjustment,” perhaps along side the creation of a permanent facility for injecting liquidity into overnight money markets to relieve an apparent tightness in the supply of bank reserves.

“The mechanics of how we do that, I think, remain to be decided, but I would be comfortable with a bigger buffer than what we have now,” Rosengren said. “Some combination of activities that generates an outcome where we don’t have as much volatility in short-term markets makes sense.”

An unexpected shortage of overnight lenders created sudden turmoil in the multitrillion-dollar money market in September, causing rates to spike to record levels and briefly tug the Fed’s benchmark rate out of its target range.

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

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Margaret Collins, Ros Krasny

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