“Today Im going to be the resident optimist,” Rosengren said in remarks on Jan. 13. “You dont normally invite an economist onto the program to be the optimist in the group, but actually the economy is doing quite well,” he told an audience at the Connecticut Business & Industry Association.
Rosengren, who heads the Federal Reserve Bank of Boston, said he expects “almost ideal” economic outcomes in 2020—inflation close to the Federal Open Market Committees 2 percent symmetric inflation target, and continued labor market strength.
Still, he warned of risks to the hopeful forecast, admitting policymakers were navigating in largely uncharted waters in todays low interest rate environment.
“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.”
Inflation running hot as companies respond to labor shortages by raising wages is a chief risk, he said.
“More rapid than expected inflation remains a risk of running the economy with accommodative monetary policy and tight labor markets,” Rosengren explained.
Resonant of Rosengrens view of upward wage pressure is a recent employment report from the National Federation of Independent Business (NFIB). It shows that, in December, finding qualified workers was the top problem for nearly a quarter of 10,000 business owners polled.
“The inability to assemble work teams is a key contributor to the comparably lackluster performance of the construction industry as evidenced by the December figures,” said NFIB Chief Economist William Dunkelberg. “Owners are raising compensation in order to attract more qualified applicants to fill open positions.”
The report showed near historic highs in the percentage of small business owners who raised or are planning to raise worker compensation.
Reach for Yield
Rosengren said loose monetary policy could lead consumers and businesses to take on riskier investments, or “reach for yield.”
Bubbles in asset prices might ensue, posing a danger to financial stability.
“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,” he said.
How dovish or hawkish the Feds policies are in 2020 will depend on inflation pressures and the possible emergence of threats to financial stability, he 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,” Rosengren said.
Robert R. Johnson, Professor of Finance at Heider College of Business, Creighton University, echoed Rosengrens view that interest rates were in the right place, adding that “the current accommodative monetary policy is appropriate, given the status of the global economy.”
“In November, inflation measured minus food and energy stood at 1.6 percent. The Feds inflation target is 2 percent. There are global disinflationary pressures, and the Fed cant simply look at the U.S. economic situation in isolation,” he told The Epoch Times.
“The specter of inflation shouldnt cause the Fed to tighten,” Johnson added. “It just means the Fed needs to be somewhat nimble in changing course if inflation does become significant.”
Allen Sukholitsky, Founder and Chief Market Strategist at Xallarap Consulting, cited data showing more muted inflation pressures going forward.
“If the Fed has not reached its target after more than ten years of an economic expansion, the likelihood that it does so now is limited,” Sukholitsky told The Epoch Times.
“One piece of evidence is that average hourly earnings have already been weakening for almost a year. Another piece of evidence is the median CPI (Consumer Price Index)—which omits extreme price changes in order to provide a better signal of the underlying inflation trend. It has been higher than the most recent level only 20 percent of the time, over the last two decades.”
Fed Officials See No Need for Rate Cuts Despite Weak Factory Data
Rosengrens remarks follow statements by other senior Fed officials who said they were comfortable with the central banks freeze on further rate cuts despite a weak factory data showing in December.
In separate interviews on Jan. 3, the Fed bosses said they have enough confidence in the strength of the U.S. economy to favor maintaining the central banks current policy of wait-and-see.
Cleveland Federal Reserve Bank President Loretta Mester, Dallas Federal Reserve Bank President Robert Kaplan, and Chicago Federal Reserve Bank President Charles Evans all said theyve seen no justification to drop the central banks current “on hold” policy.
“Im pretty happy with where policy is at the moment, and well have to wait and see,” Mester said on Bloomberg.
“I dont think we should be making any moves at this point” on interest rates, Kaplan said on CNBC.
When asked by Bloomberg whether he thought recently published weak factory data showed the economy is in trouble, Evans said, “It doesnt shake my confidence.”