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10:51 pm ET
Oct 19, 2014


Low For Long: A Q&A With Boston Fed’s Rosengren

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  • Boston Fed

  • Eric Rosengren

  • Fed

  • federal reserve

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  • Pedro Nicolaci da Costa

BOSTON–The Federal Reserve is ready to end its bond-buying program at its meeting next week, Boston Fed President Eric Rosengren said in an interview Saturday. But if overseas weakness turns out to have a greater negative impact on the U.S. economy than he currently expects, Mr. Rosengren said the central bank could just hold off further before raising interest rates. Here is a lightly edited transcript of our conversation, which took places on the sidelines of a Boston Fed conference titled “Equality of Economic Opportunity”:

WSJ: You just held a conference on the topic of inequality, but did not address the often-heard criticism that the central bank’s low rates policies are increasing wealth disparities by boosting financial markets that benefit the wealthy disproportionately. How do you respond to this concern?

ROSENGREN: “The biggest factor that affects inequality is losing your job because if you have no income the income disparity is quite large. So being focused on getting labor markets back to where we think full employment is I think the most tangible way that monetary policy can impact income inequality.

“But it’s not just that way. If you think about who tends to borrow money. It tends to be somebody who needs a student loan, it tends to be somebody who needs a car loan, it tends to be somebody who needs to finance the mortgage for their house–those don’t tend to be the top of the income distribution. It tends to be the people who are doing most of the borrowing relative to income are people in the lower quintiles. So not only in terms of employment but also in terms of the cost of credit, the people at the lower end tend to be the people that are borrowing, and the people at the top end are people that are lending. And in fact when I have talked to groups that are more at the upper end of the distribution I get a lot of complaints about their savings. But they have savings. A lot of people on the bottom don’t. So I actually think our policies have been very consistent with trying to improve the distribution of income.

“That being said, there is no doubt that asset prices are one of the mechanisms on which this is transmitted, so people that own stocks are going to do better than people that didn’t own stocks. But that’s not the only measurement, you need to look at the whole basket. The net effect is substantially weighted towards people that are borrowers not lenders, towards people that are unemployed versus people that are employed. Wealthy people are both employed and tend to lend. The people at the lower end of the distribution tend to borrow. So as a result, I think it’s very consistent with being worried about income inequality.”

WSJ: Turning to Fed policy, when do you see the likely timing of the first interest rate increase?

ROSENGREN: “I haven’t given a precise date. I won’t now, because I have been focused on data-dependence. What I have said is that we should start raising short-term interest rates when we’re one year away from being at full employment and at 2% inflation target. When we get to that point, that should be the point that we lift off. If the economy tends to improve much quicker than we’re anticipating, that would move up the date.

“Right now, many people are betting that the economy is not going to be as fast as some of the forecasts had been. I haven’t changed my own forecasts based on a week or two of volatility in financial markets. If I had changed my forecast so that I thought it was going to takes us a lot longer to get to a 2% inflation target, a lot longer to get to full employment, then we should put off the time of liftoff. So the reason I’ve highlighted in a number of my talks I’d rather be data dependent is precisely for this reason.

“At the end of August, financial market participants were saying the Federal Reserve was going to have to tighten earlier and they wanted calendar guidance that would make that clear. In the last two weeks a number of analysts–sometimes the same analysts–have argued for it to be much later. That just highlights why calendar guidance is not the way to go.”

WSJ: Do you see room for changing the Fed’s forward guidance in the near future to get away from the time element of “considerable time”?

ROSENGREN: “The chair did a very good job at the last press conference of saying data-dependence five or six times, which highlights that while there is some calendar-based words in the statement–she highlighted that if conditions were to change, that the interpretation of those words could change as well. I think given those caveats, I think it’s probably well understood that we can change the statement and some things in the statement are going to have to change if we do end the purchase program.

“So we’ll have to think about exactly what’s the appropriate wording and certainly the financial context that we’re in given the volatility we’ve seen in markets. We’re going to have to weigh how best to avoid further unsettling markets that seem to have unsettled themselves pretty well on their own. So we’ll have to take all those things into consideration. I can’t give you precise language because I think it’s really a committee decision.”

WSJ: As far as the other portion of your guidance, do you still see underutilization of labor resources as significant at this stage?

ROSENGREN: “We’re at 5.9% on the unemployment rate. My own, the Boston Fed’s internal forecast for full employment, is five and a quarter percent. So that’s a bit more than 6/10 of a percent still too high. That being said the inflation rate is still 1-1/2%, as several of the charts today showed wages are not going up, commodity prices are going down, oil prices are going down. So my best guess, at least as of now, is that if anything inflation is likely to drift down, not up. Given that, I might be willing to probe a bit further to the 5-1/4%.

“That’s one of the challenges of understanding how much labor market slack we have. We tend to talk in terms of the U-3 measure of unemployment, but the reality is the part-time for economic reasons is still quite high relative to what we’ve historically seen at this kind of unemployment rate. To me that indicates that there’s a good chance that even if we got to 5-1/4% we still may have more labor market slack than we’ve had historically.

“And I’d highlight my definition of full employment is an empirical not a theoretical concept in many respects, so that if it turns out inflation is low we should probe on the lower bound of that [unemployment rate]. We do want to get inflation back up to 2% and if we need tighter labor markets than we’ve historically needed in order to do that then we should allow the unemployment rate to drift further down.”

WSJ: Given that inflation has been drifting back down after an uptick, and given that the notion of perhaps not ending bond buys or extending them has been floated again, what would be your threshold for taking such action?

ROSENGREN: “The bond purchase program was started under the context that we needed to make substantial improvements in labor markets–5.9% relative to where we were when we started the program is a substantial improvement. Payroll employment growth has been pretty strong over the course of this year. There have been some ups and downs but overall it’s been pretty strong. We’re not going to get another labor market report. So unless my forecast of labor markets changes dramatically between now and the end of the month, I would think that the criteria for substantial improvement of labor markets would have been met.”

WSJ: That was the context in which you launched the last round of bond buys. But if you see bond buys as a useful tool and you’re missing on both sides of your mandate and can’t lower interest rates further, why not continue to use it?

ROSENGREN: “There are other tools that we can use. Staying at the zero lower bound for longer is one.”

WSJ: Do you think you get as much bang for your buck from guidance as you do from bond buys or quantitative easing (QE)?

ROSENGREN: “I think QE is quite effective. I think buying $15 billion a month–we’ve been tapering for quite a while now–at the current levels I think the impact is rounding error. So if we were missing by a significant amount and we thought the tool that we should use is QE, then I think we should be talking about a much bigger program than just maintaining at the current rate of bond purchases.”

WSJ: So would that take a much greater sense that we were heading toward a deflationary environment for us to get there? What would it take?

ROSENGREN: “If it was clear we weren’t on the path to getting 2% inflation over a reasonable period of time; if inflation continues to drift down not just over the next quarter, which is almost in the bag given what’s happened with oil prices and what’s happened with commodity prices. But if we think it’s starting to be a persistent problem, that we’re going to continue to undershoot by more than we’re undershooting now, that would be something I’d want to think about–what is the best tool to address that and QE would certainly be one of the tools I’d consider.

“That’s not in my forecast, I’m actually expecting inflation rates slowly to drift back up to 2%, not immediately but over time. I am expecting labor markets to tighten up over the next year and a half. Both of these things are going to be gradual. But I never rule things out and it could very well be that shocks from around the world are sufficient that we miss on the inflation target and potentially even drift in the wrong direction in terms of unemployment. Again, that’s not what I’m expecting, that’s not my forecast, but we have pretty big error bands around these variables.”

WSJ: What do you make of the recent market turmoil and how does it impact your thinking about policy?

ROSENGREN: “I’d be much more worried about the turbulence if I could tie it to actual events that I thought were meaningful. The incoming data domestically I think has been broadly consistent with not much of a change in forecast. Now, those variables could go off track as we go forward. But at least the data to date haven’t indicated much of a change in the domestic outlook.

“Many people have tied the turbulence to what’s going on in Europe. There were some soft reports coming out of Europe. But it’s not really a surprise that growth in Europe has been underperforming for some time. It may be a little bit softer, not dramatically softer. The inflation numbers have been coming in maybe a tenth or two [of a percentage point] lower than they were expecting. That’s not enough to explain the kind of financial market turbulence that we’ve actually seen.

“I can’t tell you exactly what it is that is associated with the financial market turbulence, so I think we need more time to process that information, see if the financial market turbulence is just volatility or whether it’s actually reflecting significant concerns about some other aspect that we haven’t seen in the real economy that will become apparent over time. When you talk to financial market analysts about what’s occurring, you don’t tend to get a story that’s particularly compelling based on real economic data.”

WSJ: As far as your outlook for growth and for inflation: How long do you think it will take for the Fed to hit its 2% inflation target?

ROSENGREN: “I’m fairly optimistic on the growth path. [...] But it is quite possible that we’ll see the U-6 [measures of underemployment] coming down more than the [official] U-3 [unemployment rate]–which is to say some of those people that are part-time become full time. That won’t change U-3 at all. We may see more people moving in that were out of the labor market. So as we move closer to 5-1/4% people that had kind of given up and become discouraged about their prospects may start coming back into the market.

“So we may get employment growth without getting much of a drop in the unemployment rate. We’ll have to see to what extent that actually occurs. It hasn’t occurred much to date. So the labor force participation rate is still a little bit low relative to what I might have otherwise expected as the labor market tightens. But I wouldn’t be surprised if the mistakes we were making on one side kind of flip and we start to see more people come back into the labor force as the labor markets continue to tighten.

“I’m expecting a little less than 3% growth over the next year and a half. My expectation is the next quarter or two, just with oil prices and things that have been going on we’re going to see lower inflation numbers, but that we’re slowly going to drift up to 2% and that, if we’re really getting 3% growth, that’s consistent with the unemployment rate continuing to drift down.”

WSJ: Do you have a timeframe for hitting the inflation target?

ROSENGREN: “We don’t forecast very well more than a year out.”

Related coverage:

Fed to End Bond Buys This Month as Planned, Says Rosengren




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