Assessing the Economy's Progress

By Eric S. Rosengren

November 9, 2015

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Newport County Chamber of Commerce Portsmouth, Rhode Island

Speaking in Rhode Island, Boston Fed President Eric Rosengren noted improvements in labor markets and said he is reasonably confident in a return to the Fed's 2 percent inflation target and to his estimate of full employment.

However, Rosengren said that with inflation below target, the path of rate increases should be gradual."I prefer a path that involves only gradual increases in interest rates and that essentially probes how tight labor markets can be, consistent with our 2 percent inflation target."

Rosengren noted that the October monetary policy statement explicitly mentioned the possibility that the first move to increase short term rates could occur as soon as the next meeting, in December.

Rosengren highlighted recent positive economic data, reflecting improvement for the economy. Looking beyond headlines of tepid third quarter GDP growth, he cited a more robust reading of the underlying strength in domestic demand (real final sales to domestic purchasers). It reflects the strength of consumer spending, boosted by improvements in labor markets, lower gasoline prices, and the relative strength in housing prices and stock prices.

The strength suggests the U.S. was little affected by the problems in emerging market countries, or by the resulting financial-market turbulence. "With little collateral damage evident from external sources, I expect domestic demand to continue to support the economy."

Rosengren also spoke about employment, citing Fed policymakers' economic projections. The current 5 percent unemployment rate is, he noted, squarely within Fed policymakers' "central tendency" for longer-run unemployment, which ranges from 4.9 to 5.2 percent.

Still, "Given persistently low wage and price pressures, and the relatively slow real GDP growth forecast in the SEP, a more gradual path of normalization may be necessary to ensure reaching the 2 percent inflation target."

Rosengren touched on financial stability considerations and the exceptionally low rate environment. Early signs of "search for yield" may be showing up in the commercial real estate market, and Rosengren suggests that the trend in commercial real estate prices be thoughtfully monitored - particularly in light of the role that commercial real estate played in the region's economic downturn in the late 1980s.

Gradual removal of accommodation offers several advantages, Rosengren noted, including providing more time to analyze the effectiveness of monetary policy tightening tools, as well as allowing for additional time to analyze how the tightening is affecting the real economy. "A slower pace reduces the risk that the Committee takes more or less aggressive action than needed or intended," he said.

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Eric S. Rosengren

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