Rosengren : Tight Labor Markets Justify Fed Plans to Keep Raising Rates -- Update
By Nick Timiraos
BOSTON -- Eric Rosengren, president of the Federal Reserve Bank of Boston, said increasingly tight labor markets should keep the U.S. central bank on its path to gradually raise rates and start slowly shrinking its portfolio of bonds and other assets, despite a surprising pause in inflation pressures this spring.
In an interview, Mr. Rosengren said he sees "some reasonable risk" that the unemployment rate drops below 4% in the next two years. "In my own view, that would not be sustainable," he said.
While the Fed's preferred inflation gauge has shown price pressures have eased since March, Mr. Rosengren said he was more focused on longer-run trends in labor markets, which argue for continued rate increases, than on month-to-month inflation figures.
Fed officials have strongly suggested their next step -- before another rate increase -- will be to announce in September they will begin winding down their holdings of Treasury and mortgage securities. Mr. Rosengren appeared to support that view.
"I do think the market has appropriately started to say, 'Gee, this seems to be about the right time'" to announce the wind-down of the balance sheet, said Mr. Rosengren, who isn't a voting member of the Fed's rate-setting committee this year. With the Fed's benchmark short-term interest rate well away from near zero, "there's no reason to have that extraordinary accommodation coming from the balance sheet any longer," he said.
Officials believe that as the jobless rate falls, pressures are building on firms to raise wages and economic resources more broadly are becoming scarcer, which will move inflation higher.
Several measures of wages and salaries show that over the last two years, "the trend is very clearly going up, which is an indication that we're probably a little past full employment," Mr. Rosengren said. "And to be honest, it's a little early to be seeing that" because the unemployment rate only recently fell below the level officials believe will generate inflation.
The Fed voted last week to keep its benchmark federal-funds rate steady in a range between 1% and 1.25% and indicated that at its next meeting it could announce it will begin allowing small amounts of the $4.2 trillion in Treasury and mortgage securities it amassed after the financial crisis to roll off its balance sheet.
The Fed's next meeting is Sept. 19-20. In June, officials raised rates for the second time this year and penciled in one more quarter-point increase this year. Mr. Rosengren said he still expects the Fed will need to raise rates one more time this year.
Mr. Rosengren was a staunch advocate for the Fed's campaign to provide generous stimulus after the financial crisis, but over the past year he has advocated for the Fed to steadily unwind that support to avoid an economy that overheats.
(MORE TO COME)
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