–Would Not Rule Out Altering Normalization
By Anthony Mace
BOSTON (MaceNews) – Fed policy-makers must pay attention to the gloomy message coming from financial markets, but underlying fundamentals point to better economic prospects, Boston Fed President Eric Rosengren said Wednesday.
For now, there is “no bias toward tightening or easing,” and policy-makers will focus on incoming economic data along with market signals, Rosengren told the Economic Club of Boston, in prepared remarks before answering questions.
“We do have to take quite seriously the movements in financial markets,” he said, but on the other hand, economic data, such as the latest employment report, point to a “rosier outcome.”
One benefit of the negative shift in financial markets, including the rise in volatility, is that lenders have been obliged to price in more risk, he said in response to a question after the speech. “I do worry about the level of leverage in the corporate sector,” and elsewhere, he said.
In response to another question, Rosengren said he did not focus in particular on the shape of the yield curve. “I do pay attention to the shorter end,” he said. “When you start seeing the short end pricing in a fed funds decrease, that certainly catches my attention.”
Another questioner asked whether the Fed should select either fed funds or altering its balance sheet in adjusting policy. Rosengren answered his preference is to focus on the funds rate. The Fed has more information about how the economy responds to the short-term rate, he said.
The Fed’s balance sheet adjustment has been effectively on autopilot, he acknowledged, “but if we get a dramatic slowdown, I wouldn’t rule out doing something with the balance sheet.”