NEW YORK (MaceNews) – Fed policy-makers see a benign economic outlook but they should remain alert to upside inflation and financial stability risks posed by prolonged low unemployment and low interest rates, Boston Fed President Eric Rosengren said Monday.
Rosengren, who opposed the Fed’s three rate cuts in 2019 along with Kansas City Fed President Esther George, said he and other policy-makers expect inflation to return to target, labor markets to remain strong, and growth to stay close to potential as long as these risks remain contained.
“I have highlighted two potential risks that I will be monitoring this year – inflation picking up more than currently expected; and asset prices, particularly real estate prices, showing evidence of more acute financial stability risks,” Rosengren said in a text prepared for delivery to the Connecticut Business and Industry Association in Hartford, Conn. “To be fair, there are also downside risks to the economic outlook, as well – primarily centered on the potential for trade disruptions and slowing growth among our trading partners. But I see the potential risks to inflation and financial stability as somewhat more concerning, overall.”
“As a practical matter, central bankers do not have much historical experience with extended periods where interest rates are running below the estimated equilibrium level while unemployment rates are, simultaneously, historically low. So we want to be alert to any potential risks emerging. …If these risks remain contained, my view is we will likely have another year of good economic outcomes.”
Rosengren said the real estate sector bears close watching for signs of excessive risk-taking, given its history and impact on past recessions. “It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for-yield behavior – a scenario that preceded the 1990 and 2007 recessions. In certain scenarios, financial stability risks could potentially emerge as a problem for the otherwise benign forecast.”
Monetary policy is currently accommodative, while forecasts for GDP growth, unemployment, and inflation remain favorable, and stable, and these expectations form the basis for a forecast of steady interest rates this year, and gradual interest rate increases after that, Rosengren said. “Certainly, the lack of inflationary pressure to date has provided one justification for accommodative monetary policy despite the duration of the recovery and a current historically low unemployment rate. However, maintaining interest rates below the consensus longer-run ‘equilibrium’ interest rate is predicated on both inflationary pressures not building up and financial stability concerns being contained,” he said.