ONE MORE interest rate hike in 2018 won’t satisfy Eric Rosengren’s definition of gradual. In an interview, the president of the Federal Reserve Bank of Boston made clear that, barring an unexpected turn for the US economy, he’ll push for two more increases before year’s end.
With unemployment low and likely to keep falling, and with inflation at the central bank’s 2% target and likely to rise, Mr. Rosengren said Saturday, “I don’t see any reason why we wouldn’t continue to gradually increase rates.”
Mr. Rosengren said he forecasts the US economy to expand at a 3% clip in the second half of the year.
Fed officials are widely expected to lift rates when they meet later this month. While the prospects of another increase in December have also been rising in the eyes of investors, it remains unclear whether policy makers will follow through on what would be a fourth move in 2018.
Rosengren had no hesitation in favoring a fourth increase and went further, saying he wants to keep rates moving higher next year as well.
“Going beyond just the next two hikes, I see no reason why we wouldn’t want to be at a more normalized rate, given the economic conditions we currently have, unless something changes dramatically that we’re not anticipating,” he said.
Mr. Rosengren, who’ll vote in 2019 on the policy making Federal Open Market Committee, said his estimate of “normal” for the Fed’s benchmark interest rate is, roughly, just below 3%, or a full percentage point above current rate.
Once among the Fed’s dovish voices, Mr. Rosengren pivoted to a more hawkish stance in 2016 as unemployment fell into territory that he believed might eventually fuel excess inflation. He also began worrying about a potential bubble in commercial real estate. On Friday and Saturday, he hosted a conference at the Boston Fed dedicated to studying the impact of long-term low interest rates on the economy, investing behavior and financial markets.
Rosengren, who’s led the Boston Fed since July 2007, declined to say whether the Fed should stop raising rates once it reaches a spot judged to be neither adding fuel to the economy nor hitting the brakes, a level known as the neutral rate.
“I wouldn’t be supportive of saying there’s something special about” hitting neutral, Mr. Rosengren said. “We want to get back to a more normalized monetary policy, but there’s no reason necessarily to pause at any point until we think we’re at the appropriate place for where the economy is.”
Mr. Rosengren acknowledged several risks that could knock the economy off course, including trade disputes, the potential for slowing growth in China, and turmoil in other emerging markets.
He said recent stresses in countries such as Turkey and Argentina weren’t so severe that they would affect the US economy, so the Fed shouldn’t react to them. Still, “we should be sensitive” to these risks, he said, “and not over-confident.”
Mr. Rosengren, 61, repeated his call for the Fed to activate a safety cushion for big banks known as the counter-cyclical capital buffer. Set by the central bank’s Washington-based Board of Governors, the buffer is designed to make banks set aside capital during good times. For healthy banks, it’s then reduced during bad times, releasing the capital for lending.
Earlier this year, Mr. Rosengren became the first Fed official to call for the buffer to be raised from its current level of zero. He’s since been joined by Fed Governor Lael Brainard and three other regional Fed presidents. Chairman Jerome Powell and Vice Chairman for Supervision Randal Quarles have so far not publicly voiced any support the idea.
Mr. Rosengren said he’ll continue making the case.
“Just like I’m willing to talk about this with you, I am willing to talk about this with anyone interested in talking about it,” he said. “I think it is better policy, and if it is good policy, we should have a discussion.”
Asked whether he thinks his argument is being heard in Washington, Rosengren said, “You can be the judge of that. I started out as a voice of one; there is more than one voice” now.
At the Boston Fed’s conference, Mr. Rosengren and former Treasury Secretary Lawrence Summers both warned that interest rates are likely to crash back to zero in the next downturn, complicating the ability of the central bank to pull the economy out of recession by simply lowering rates.
Mr. Summers also called the results of the most recent Federal Reserve stress test of the largest banks “comically absurd,” and he said regulators should boost capital at financial institutions.
In a separate interview at the gathering, Cleveland Fed President Loretta Mester signaled her support for continued rate increases. She also said she favored raising the counter-cyclical capital buffer. — Bloomberg