Federal Reserve Bank of Boston President Eric Rosengren said uncertainty over inflation and global growth justify a modest pace of interest-rate increases, regardless of when the central bank begins tightening.
“Given current and forecast conditions, not only is the pace likely to be gradual, but the federal funds rate in the longer run may be lower than in previous tightening cycles,” he said Tuesday in a speech to the Forecasters Club of New York.
Rosengren and his colleagues on the Federal Open Market Committee will gather in Washington Sept. 16-17 to consider raising rates for the first time since 2006. He said recent stock market turmoil, and data pointing to weaker global growth, could sap confidence that inflation would head higher.
The Fed has said it will be appropriate to raise rates when it has seen some further improvement in the labor market and is “reasonably confident” inflation will move back to its 2 percent target over the medium term.
Rosengren, who will vote on policy next year, said employment conditions had “largely been met” by strong jobs growth in recent months. Companies added about 1.5 million positions this year, according to non-farm payroll reports.
Data on inflation, he said, was not as clear-cut.
“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 percent inflation,” he said.
Prices in the U.S. rose 0.3 percent in the 12 months through July, measured by the Fed’s preferred gauge. Inflation has lingered below the Fed’s 2 percent target for more than three years.
Fed Vice Chairman Stanley Fischer on Saturday said “there is good reason to believe that inflation will move higher” as forces holding down inflation, such as oil and a strengthened U.S. dollar, dissipate.
Rosengren said his own outlook on inflation is dependent on whether he believes the economy will continue to expand faster than the long-term potential for growth. That, in turn, is threatened by recent turmoil in stock markets and falling commodity prices, which are “consistent with a weaker global economy,” he said.
Such developments “might suggest a downward revision in the forecast that is large enough to raise concerns about whether further tightening of labor markets is likely,” Rosengren said.
Proceeding more slowly than in previous tightening cycles will “enable monetary policy makers to gauge how tight labor markets can be while maintaining stable prices,” he said.
Investors put the chances of a September rate increase at 34 percent, based on Tuesday pricing of fed funds futures contracts and assuming the effective rate will average 0.375 percent after liftoff.
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