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Home>Regular And Gradual Rate Increases Are Right Path, Fed's Rosengren Says -- Update

Regular And Gradual Rate Increases Are Right Path, Fed's Rosengren Says -- Update

Regular And Gradual Rate Increases Are Right Path, Fed's Rosengren Says -- Update


 By Michael S. Derby 

Federal Reserve Bank of Boston leader Eric Rosengren said Wednesday additional rate rises are necessary to prevent the economy from overheating.

In a speech given to a gathering of the Money Marketeers of New York University, Mr. Rosengren explained that a very strong job market means that currently low inflation will inevitably rise, and to keep it from exceeding the Fed's 2% inflation rise target, the Fed needs to act.

"It is my view that regular and gradual removal of monetary accommodation seems appropriate," Mr. Rosengren said in his speech.

"Trends, as best I can see them at present, suggest to me an economy that risks pushing past what is sustainable, raising the probability of higher asset prices, or inflation well above the Federal Reserve's 2% percent target," Mr. Rosengren said. "Steps lowering the probability of such an outcome seem advisable -- in other words, seem like insurance worth taking out at this time."

Mr. Rosengren, a veteran central banker, isn't currently a member of the interest-rate setting Federal Open Market Committee. That body met last week and maintained its target rate range at 1% and 1.25%, while signaling another increase remains likely this year.

Raising rates again is very controversial, as inflation remains well below the Fed's 2% price rise target. In fact, instead of increasing, price pressures have weakened over the course of the year, and damaged the Fed's case for boosting the cost of borrowing. Minneapolis Fed leader Neel Kashkari, an FOMC voter, said Monday "the Fed should be under no pressure to raise rates. We have time to let inflation climb back to target."

Echoing top officials like Fed Chairwoman Janet Yellen and New York Fed leader William Dudley, Mr. Rosengren said inflation has been weak due to transitory factors that are unlikely to persist. And critically, the current jobless rate of 4.4% is below what officials consider sustainable, which means that over time it is sure to stir higher inflation, he said.

Given the hot job market, "appropriate risk mitigation would argue for continued gradual removal of monetary accommodation, even though we are currently below the inflation target."

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