Fed's Rosengren: Expect "Much More Gradual" Return to Normal Policy

Boston Federal Reserve President Eric Rosengren said Tuesday that the ongoing economic recovery from the 2008 financial crisis is different than past recoveries and will require a “much more gradual” normalization.

In other words, once the Fed pulls the trigger and starts raising borrowing costs, the upward trajectory of interest rates can be expected to be slow and extremely measured.

It’s a point numerous influential Fed policy makers – including Fed Chair Janet Yellen -- have conveyed frequently and loudly in recent months as the central bank prepares for the first rate increase in nearly a decade.

“Today I will argue that there are very good reasons to expect a much more gradual normalization process than occurred in the previous two tightening cycles,” Rosengren said in prepared remarks during a speech to the Forecaster’s Club in New York.

Rosengren’s comments avoided the hot topic of when the first rate hike might be announced. A question-and-answer period was scheduled for after his speech.

Significant market volatility in recent weeks – the Dow Jones Industrial average was down as much as 370 points Tuesday morning on more bad news out of China – has some analysts speculating the central bank may hold off on an initial rate hike until later in the year, delaying the move past their upcoming September meeting.

Rosengren, a strong inflation dove and currently an alternate voting member of the policy-setting Federal Open Market Committee,  reiterated a point often made by his Fed colleagues in recent months – that the trajectory of interest rates is far more important than the timing of the first rate hike.

Rosengren suggested that the timing for achieving the Fed’s 2% target rate for inflation may be farther down the road than many economists have forecasted.

The Fed has said it won’t raise interest rates until the economy achieves the central bank’s dual mandate of full employment and price stability. After its July meeting, the FOMC statement said rates shouldn’t move higher until labor markets “see some further improvement” and policy makers are “reasonably confident” inflation is headed toward the Fed’s 2% target rate.

Rosengren said the former has been achieved, citing strong monthly job growth and the steady decline in the headline unemployment rate. The latter, however, has proven difficult and may be farther away than was earlier predicted.

“For this condition, the data has not been as clear cut,” Rosengren said.

Core inflation has hovered at 1.2% the past year, he noted, and the recent plunge in the price of oil and other commodities suggests prices will remain low for some time to come. Recent global economic turmoil, including the threat of a weakening Chinese economy, could also cut into worldwide demand, keeping prices and inflation low.

“Adding to this, recent reports on wages and salaries still show few signs that the tightening labor markets are translating to increases in wages and salaries consistent with reaching 2% inflation,” he said.

Rosengren further noted that economists have been predicting for some time that tightening labor markets would lead to higher wages and ultimately higher prices, but those forecasts have been wrong.

“You might say the incoming data have not cooperated with the forecasts,” he said.