Stronger US Economy Could Justify "Restrictive" Rates: Rosengren, Boston Fed

BOSTON (Reuters) – Boston Fed President Eric Rosengren has given up calling for low interest rates to tighten monetary policy.

Two years later, Rosengren joined his colleagues to start setting the stage for these rate hikes to potentially extend longer and to a higher than expected level as the economic outlook grows stronger.

Rates may not only have to become "restrictive," but the definition of these rates may also increase, said Rosengren in an interview with Reuters on Saturday after an economic conference.

"This is not hair on fire. There is upward pressure on inflation and, given that we are already at 2%, labor markets are already tight … we will start having inflation above our target, "said Rosengren . "There is an argument to normalize the policy and probably be slightly restrictive."

The Fed maintains an inflation target of 2%, which it reaches only after a decade of difficulties in maintaining it and maintaining it.

He said the Fed did not need to move faster than the current gradual pace, resulting in a quarterly rate hike, with the next scheduled for the end of the month. This sustained pace is a luxury achieved by starting early, he said, avoiding moving faster and catching up with the economic slowdown.

But the terrain has changed since. With growth close to 3%, full employment and the risk of global trade tensions "incorporating" faster price increases, Rosengren said, "We have a pretty good idea of ​​the situation

This points to two new increases this year and three in 2019, bringing the Fed interest rate to just over 3% by the end of 2019.

Data from the June Fed meeting show that the central bank is pausing at this level, with the median projection of policymakers predicting only one more rise in 2020. The Fed would then be slightly higher than its counterpart. the restrictive zone that Rosengren and Chicago Fed President Charles Evans said this week would probably be needed.

As the current tightening cycle stops, there is another problem.

Officials warn against putting too much stock in long-term policy projections, given the speed with which economic events can change their thinking. But, starting with President Jerome Powell, they have also begun to warn that their functional estimates, like the neutral rate, may be too imprecise to serve as a short-term political guide. Others have stated that, regardless of the neutral rate, it could progress as the economy improves.

The Fed's most quoted estimate, based on an economic model developed by New York Fed President John Williams, and the Fed's monetary director, Thomas Laubach, may have shown some of the hazards. After being close to zero, the model's neutrality estimate has hovered around 1% based on revisions to the economy's impact on potential, according to data published on the New Fed's website. York.

Policy makers will issue new projections at their meeting later this month, and Rosengren said that data on employment and growth seem increasingly "inconsistent" with estimates of low neutral rate.

In other words, the current policy may be more flexible than expected and the economy can tolerate increased tightening.

"It would not surprise me at all if the committee's estimates … increase over time," said Rosengren. And if these estimates increase, "you expect the way to evolve too," he said.