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Boston Fed chief says interest-rate hike will be gradual

Boston Fed president Eric Rosengren said that what happened in 2008 is “still pretty fresh.”
Boston Fed president Eric Rosengren said that what happened in 2008 is “still pretty fresh.”Pat Greenhouse/Globe Staff/File

NEW YORK — Eric S. Rosengren isn’t sure when his colleagues at the Federal Reserve will raise interest rates, but the Boston Fed president is confident that when rates do climb, it will be gradual.

Rosengren, in an interview on Tuesday with The Boston Globe, said policy makers are watching the movement and impact of global stock markets as they try to determine whether the recent turmoil signals a long-term downturn or a temporary slip as investors adjust to changing economic conditions.

Rosengren is a nonvoting member of the Federal Open Market Committee, which meets in Washington on Sept. 15-16 to debate whether to raise its key short-term rate from near zero, where it has stayed since the end of 2008.


“We don’t have a great explanation of why stock markets are so down around the world,” Rosengren said before delivering a speech to the Forecasters Club of New York. “It makes me want to gather more information.”

Global markets have plunged over concerns about the impact of a slowing Chinese economy, the world’s second- largest, after the United States’. The Dow Jones industrial average fell 6.6 percent in August, its biggest percentage decline since May 2014. Following broad declines in Asian and European markets earlier Tuesday, the Dow fell 469.68 to close at 16,058.35.

This could be “just a portfolio redistribution” as China attempts to transform itself into a more open, market-based economy, Rosengren said, and not of much concern. Or it could be a sign of deeper problems.

“If households and firms become more risk-averse, that can slow down the economy,” he said. “But it’s too soon to tell.”

Rosengren said it won’t make much difference to the economy whether the Fed raises rates this month or a few months later. He said he expects the central bank to increase rates at a much slower rate than during past expansions. And he said his views about the strength of New England’s economy are formed by data, research, and discussions with business leaders across New England.


Just a few weeks ago, the Fed seemed all but certain to raise interest rates by a quarter of a percentage point this month as the US economy continues to improve, adding jobs and expanding at a steady pace. The downturn, however, has raised the prospect that the central bank may further delay the long-awaited rate hike.

Rosengren, in the interview, suggested that if policy makers delay increasing rates in September, they may do so later this year. “It’s near,” he said.

Investors see a 34 percent chance of a rate hike this month, based on options prices. The likelihood rises to 47 percent in October.

In recent weeks, other Fed officials have signaled uncertainty about the timing of a rate hike. Last week, Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said he expected policy makers to move ahead with a quarter-point increase at the September meeting. But William C. Dudley, president of the Federal Reserve Bank of New York, said the argument for raising rates had become “less compelling.”

Stanley Fischer, the Fed’s vice chairman, suggested that a strong case for raising rates may have been weakened by market turmoil, but an increase was coming — if not in September, not much longer after that.

Fed vice chairman Stanley Fischer said the case for raising rates is weakened by market turmoil, but a hike will come eventually.
Fed vice chairman Stanley Fischer said the case for raising rates is weakened by market turmoil, but a hike will come eventually.Jonathan Crosby/Reuters

Nariman Behravesh, chief economist at IHS Global Insight, a Lexington forecasting firm, said the Fed should postpone a rate increase until its late October meeting or the following one in mid-December. An increase prior to that would only “exacerbate the anxiety and volatility in the market,” he said.


“Circumstances have changed,” Behravesh said. “The hope is that the Fed isn’t rigid.”

Jim O’Sullivan, chief US economist at High Frequency Economics in Valhalla, N.Y., said the market jitters are likely to pass, noting that US auto and construction goods sales showed increases this week and that China’s economic slowdown may be overstated.

“Overall, growth still looks solid enough to bring the [US] unemployment rate down,” he said. “At the end of the day, that’s what the Fed is looking at.”

The unemployment rate for August will be released Friday, but Rosengren said the July rate of 5.3 percent is low, and a good sign of progress. But broader measures of the labor market that include those who have given up their job searches or are working part time but want full-time work show much weaker conditions.

Wages have also remained flat, while inflation remains very low.

Brian Bethune, an economics professor at Tufts University, said the Fed should not raise rates and risk triggering deflation at a time when exports have slowed, oil prices are low, and overseas growth has stuttered.

“December will be the earliest window” for a rate increase, Bethune said. “Unless we get some significant good news.”

Rosengren said that when the Fed starts raising rates, which it hasn’t done since 2006, it should be viewed as good news, a signal the US economy is on the right track.


“I think the path [of interest rate increases] is more important than the exact timing, as long as the process is gradual,” he said.

Rosengren became president of the Boston Fed in late 2007, just as the downturn that became the Great Recession got underway. Since then, the Fed has undertaken unorthodox measures to try to stimulate the economy. Rosengren said he looks forward to the day he can confidently call for a rise in interest rates.

“It’s still pretty fresh, what happened in 2008,” he said.

Megan Woolhouse can be reached
at megan.woolhouse@globe.com. Follow her on Twitter @megwoolhouse.