Citing uncertainties about inflation and global headwinds, Boston Federal Reserve President and CEO Eric Rosengren ’79, P’12 called Tuesday for an “unhurried” approach to raising interest rates in the near future.
In a speech at Colby College, the Fed executive said that normalization of monetary policy should take a measured approach if inflation, a key indicator, is slower to return to the 2 percent target forecast by analysts and Federal Reserve policymakers.
“While most observers expect that the appreciation of the dollar and the fall in oil prices will eventually stabilize, recent global events may make it less likely that the two-percent inflation target will be achieved as quickly as had been projected,” Rosengren said.
“We don’t have to be in a rush on monetary policy,” he said. “A more gradual monetary policy path is an appropriate response to headwinds from abroad.”
Head of the Boston Fed since 2007, Rosengren stressed the importance of understanding the relationship between expectations about the economy and the response of policymakers.
In December 2015 the Federal Open Market Committee (FOMC) raised the federal funds rate—the rate that banks charge each other—by one-quarter percent, the first rate increase in a decade. At that time the committee released its projections, which generally expected that the economy would grow a little faster than 2 percent. But actual growth in 2015 was just 1.8 percent. Moreover, a slowdown among global trading partners, a decline in stock prices, and the strong U.S. dollar could result in slower growth, Rosengren said.
“If more pronounced global weakness were to materialize and be transmitted to the U.S., I personally believe there would be little need to raise rates until the economy was growing closer to its potential rate,” Rosengren said.
He also pointed out the critical nature of expectations about inflation, citing a New York Fed study showing inflation expectations drifting downward since 2008. Downward expectations make it less likely that the economy can hit the Fed’s 2-percent inflation target.
“There is one way that temporary downward pressures on reported inflation could pose more-permanent impediments to reaching the two-percent inflation goal—if inflation expectations were to change as households and firms viewed the prospects for future inflation differently,” Rosengren said.
It is important for policymakers to be “data dependent,” he said, focusing on real evidence and available metrics in decision making. “Data coming in much stronger than forecast would result in interest rates going up more quickly than projections and, in contrast, data much weaker than forecast would result in interest rates going up more slowly than projections,” Rosengren said.
Rosengren, who credits his undergraduate experience at Colby for inspiring his interest in economics, went on to earn a Ph.D. from the University of Wisconsin, Madison. President of the Boston Fed since 2007, he has developed a reputation for his deep intellect and unbiased analysis, and he has been a significant contributor to Federal Reserve policymaking and efforts to secure global financial stability.
Prior to assuming the presidency at the Boston Federal Reserve, Rosengren headed the bank’s supervision, regulation, and credit group and was active in domestic and international regulatory policy. He has written extensively on macroeconomics, international banking, bank supervision, and risk management, including articles in leading economics and finance journals. Much of his research has focused on how problems in the financial sector impact the real economy.
Rosengren led off his remarks with praise for Colby’s initiatives in revitalizing downtown Waterville. “So-called anchor institutions are critically important to the development of small cities, and an economically vibrant Waterville can pay large dividends for all of central Maine,” he said.