Boston Fed President Eric Rosengren said in a speech on Thursday that he does not believe the U.S. economy is equipped for raised interest rates, as it has not met the necessary conditions outlined by Federal Reserve’s policy committee in March.
The first condition required that the Federal Open Market Committee saw improvement in the labor market. To meet the second condition, the committee had to be confident that inflation would move back to its 2 percent objective over the medium term.
“At this time, I do not think that either condition has been met,” Rosengren said in a statement while speaking at the Chatham House in London. “Although there has been noticeable improvement in the labor market over the past few years, since March the indicators have been a bit mixed. Furthermore, inflation remains stubbornly below our target of 2 percent.”
Rosengren advised audience members to focus on the unemployment rate and the federal fund rate, rather than solely on interest rate projections published in the Fed committee members’ forecasts.
“In addition to being relevant for current monetary policy decision-making, these measures are also relevant to the discussion of how best to utilize simple monetary policy rules,” Rosengren said in a statement.
According to Rosengren, possible factors behind the recent lower estimates for the unemployment rate include “the absence of wage and price pressure,” as these variables are “consistent with some slack still remaining in the labor markets, even with an unemployment rate that has fallen to 5.5 percent.”
Rosengren also discussed the implications of lower longer-run, or equilibrium, federal funds rates. He noted that rates may not need to rise as much to return to “normalized” interest rates. Also, he said, policymakers may have less room to lower interest rates in the event of economic weakness, “and will thus be more likely to hit the zero lower bound for interest rates,” he said, adding that these variables might imply that inflation targets were set too low.
The proposed changes provide a further rationale for looking beyond simple monetary rules, Rosenberg said, emphasizing that they could not capture the “full complexity involved in determining appropriate monetary policy,” especially in times of recession and economic instability.
“For me, there is wisdom in utilizing a more flexible and comprehensive set of variables and models when considering appropriate monetary policy,” Rosengren said in a statement. “Rules are likely best used as guidelines, along with a host of other inputs – the most important of which are good judgment and hard-won experience.”
