By Jerry Kronenberg
NEW YORK (MaceNews) – Boston Federal Reserve President Eric Rosengren said Tuesday that the U.S. economy faces neither recession nor problem inflation, but that the Fed might need to consider tightening credit next spring to keep markets from taking on excessive risks.
“Part of the way that monetary policy works is that you encourage more risk-taking,” Rosengren said during an address before the Forecasters Club of New York. “I do believe that college endowments reach for yield, that pension funds reach for yield — and as a result, they take on more risk when you have a low interest-rate environment for a long period of time. I don’t think the household sector is particularly levered, but I do think the corporate sector is levered. So, I do have concerns about financial stability.”
Rosengren said he believes other members of the central bank’s rate-setting Federal Open Market Committee will begin to share his view next spring, when he expects currently low U.S. inflation to approach the Fed’s 2% target. The central banker, who dissented from all three of the Fed’s 2019 rate cuts, said he’ll begin arguing his case then.
“I would prefer probably a different level of rates, [but] I’m willing to wait until we get closer to that 2% inflation target,” he said. “I’m expecting probably by the springtime to see numbers that are much closer to 2%, [and] I think at that time, the committee is going to have to start thinking about these financial-stability concerns a little bit more bit.”
But for now, the Boston Fed chief said that the U.S. economy “continues to perform quite well, as the December employment report from the Labor Department [released last Friday] highlighted. We have strong labor markets, with the unemployment rate returning to its 50-year low. And the reported job growth of 266,000 [November non-farm employment gains] was a nice surprise.”
Rosengren said such positive figures make it unlikely that the central bank will have to ease monetary policy beyond the three rate cuts that it already made this year.
“With the recent positive economic news and with monetary and fiscal policy already accommodative, I see no need to make the current stance of monetary policy more accommodative in the near term,” he said. “Given that monetary policy works with lags and Federal Reserve policymakers have already eased monetary policy three times in 2019, my view is that it is appropriate to take a patient approach to considering any policy changes unless there is a material change to the outlook.”
The central banker added that he believes the U.S. unemployment rate will stay near its current 3.5% level in the foreseeable future, which is generally at or even below what economists consider full employment. Rosengren also thinks U.S. inflation, which is below the Fed’s 2% goal as measured by the U.S. Personal Consumption Expenditure rate, will remain muted as well.