Federal Reserve Bank of Boston president Eric S. Rosengren on Monday joined a growing chorus of his central bank colleagues striking an upbeat tone about the US economy and the need for more interest rate increases, potentially diverging from the group’s most powerful member.
Rosengren warned investors betting on just one or no interest rate increases this year that they may be wrong. Investors have been more skeptical about potential rate increase this year after Federal Reserve Chairwoman Janet Yellen last week advocated for a more measured pace given the uncertainties of the economy and the global outlook.
But following Friday’s robust jobs report for March, which showed wages ticking up, Rosengren said the US economy has so far weathered a slowdown in overseas economies and volatility in financial markets.
“The US economy is continuing to improve despite the headwinds from abroad,” Rosengren said at a Fed cybersecurity conference in Boston. “If the incoming data continue to show a moderate recovery – as I expect they will – I believe it will likely be appropriate to resume the path of gradual tightening sooner than is implied by financial-market futures.”
Rosengren, a voting member of the Open Market Committee, the Fed’s rate-setting panel, repeated his oft-expressed position that any rate increases would be gradual and based on the economic data reviewed by the Fed. Other members of the committee have also sounded more bullish about the pace of rate increases. Last Friday, Cleveland Fed president Loretta Mester said the economy is growing at a fast enough pace for the central bank to continue its gradual path to higher rates. And the Federal Reserve Bank of St. Louis president has even suggested a rate increase this month could be justified.
In contrast, Yellen has said she is less certain that the economic data warrant further rate increases as quickly, in particular pointing out that inflation hasn’t risen by the 2 percent that economists peg as healthy growth.
“You’ve got two fairly different perspectives being aired fairly publicly,” said Nariman Behravesh, chief economist from IHS Inc., a forecasting firm in Lexington. “Yellen has her work cut out for her in bringing about consensus.”
The central bank raised its benchmark interest rate by a quarter point in December, after holding it near zero since the end of 2008. Policy makers had hoped to move to more normal monetary policy this year by raising rates four more times.
That plan was put on hold after oil prices crashed earlier this year over fears of a global slowdown and chaos erupted in the financial markets. Central bankers in other countries adopted negative interest rates, as a way to spur bank lending, borrowing, and economic growth. At its March meeting, the Fed declined to raise interest rates.
But financial markets have stabilized and economic weakness abroad has not spread to the United States, Rosengren said.
“The risks seem to be abating that problems from abroad would be severe enough to disrupt the US recovery,” he said. While European and Japanese financial markets have weakened significantly and are below their performance in mid-December, the United States has rebounded, he added.
In addition, employers added 215,000 jobs in March, the US Labor Department reported Friday. Also, more Americans who had been sidelined in this recovery felt more optimistic and started looking for work and average hourly wages rose seven cents to $25.43. That pattern, if it continues, could suggest stronger wage growth than in the past few years.
Challenges to this recovery remain, including the strong US dollar, which raises the cost of American goods abroad, Rosengren said, but the economy seems to be back on track after a shaky start at the beginning of the year.
Futures markets aren’t convinced. They predict a very high probability of one or zero increases in rates by the end of this year, Rosengren said.
“My own sense is that financial markets may have reacted too strongly,” he said.
Behravesh said the mixed signals from central bank members about the pace of interest increases will likely confuse investors. But ultimately, any increases are only lifting the rate up by about a quarter point at a time and will likely have very little impact on the overall economy.
“What we’re talking about is tiny,” Behravesh said.