Boston Fed’s Rosengren `Quite Positive’ on Policy But Short-, Long-Term Risks Remain

9:27 AM, Apr 13, 2018 — Boston Fed President Eric Rosengren said on Friday that he and his colleagues are “quite positive” on the policy, citing fairly strong economic growth, falling unemployment and inflation close to the Federal Reserve’s 2% target.

Still, there are risks to the positive outlook, he said. Trade disruptions are unlikely at this point but the ongoing dispute between the US and China are cause for at least some concern.

“It would take a significantly broader set of trade actions than those reported to date to materially reduce the roughly $2.4 trillion in annual U.S. exports,” Rosengren said during a speech at the Greater Boston Chamber of Commerce’s Economic Outlook Breakfast in Boston. “Still, spillover effects are possible.”

An overheated boom-bust scenario may be more likely if unemployment moves far below policymakers’ expectations, he said. Today’s unemployment rate is below the Congressional Budget Office’s estimate of the natural rate, he said. Periods when unemployment dipped “significantly and persistently” below estimated natural rates historically have generated conditions that resulted in recession, Rosengren said.

In the longer term, the status of fiscal and monetary policy buffers call into question the ability to work against a shock or a downturn, he said.

“By using up so much fiscal capacity now — by which I mean the ability to lower tax rates or boost federal spending to offset economic weakness — the country risks not having sufficient fiscal capacity in the future when it might be needed,” Rosengren said.

There’s reason to be concerned about how quickly aggressive Fed policy can respond to large adverse shocks should they occur, he said, noting that the median forecast among Federal Open Market Committee members for longer-run interest rates are 2.9%. That’s “quite low” by historical standards, which likely are a result of slow labor force growth coupled with slow growth in productivity, he said.

If a recession were to occur, it’s possible and even “quite likely” that interest rates would reach zero again in a downturn as the Fed tends to lower rates by as much as 5 percentage points in a recession. Rosengren said he hopes these risks can be avoided.

“The economic outlook is good, but we all must be attuned to what could go wrong in the short term and in the long term, and what that implies for appropriate monetary policy,” he said.

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