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Boston Fed chief outvoted on rate hikes

Eric S. Rosengren is president of the Boston Fed.Pat Greenhouse/Globe Staff

The country’s central bank kept a key interest rate unchanged Wednesday, putting the president of the Federal Reserve Bank of Boston, Eric Rosengren, in an unusual spot: on the outside.

Rosengren joined two other members of the Fed’s rate-setting committee in disagreeing with the decision. It was a rare move for the 31-year veteran of the Boston Fed, who had supported lower rates and stimulus as a way to boost the economy.

But in recent months, he has warned that keeping interest rates too low for too long could overheat the economy.

In a statement wrapping up its two-day meeting on Wednesday, the Federal Reserve suggested that it needed stronger evidence of economic growth, but is likely to raise rates before the end of the year. Investors viewed the news positively, sending stock prices higher and the yield on the 10-year Treasury lower, because the Fed signaled that future rate hikes would be gradual.

During a news conference after the meeting, Fed chair Janet Yellen said central bankers are concerned about bubbles in the economy, but added that overall they don’t believe “the economy is overheating now.”


That Rosengren is arguing for quicker action shouldn’t come as a surprise, said Mark Zandi, chief economist at Moody’s Analytics, a research unit of the ratings agency Moody’s Corp. “He’s less entrenched in a particular view,” Zandi said. “He’s a pragmatic member. He’s looking at the data and thinking it’s time to move.”

Employers continue to add jobs at a modest pace, inflation shows signs of inching up, and after a volatile year, the global economy is fairly stable, Zandi said.

In recent months, Rosengren has also been vocal about his fear that the low-interest-rate environment is creating a bubble, particularly in the commercial real estate market as investors from around the world chase higher returns by putting their money into apartments and office buildings.


That view was probably influenced by Boston’s economy and the city’s building boom, economists said.

Rosengren also studied the New England real estate and banking collapse of the late 1980s and early 1990s and has drawn on that experience in recent speeches warning about potential bubbles.

“It’s a macroeconomic view, versus a regional and sector view,” said Sara Johnson, a senior research director at IHS Inc., a Lexington forecasting firm. “Regional presidents might have a better appreciation of the on-the-ground conditions than the Federal Reserve Board in Washington.”

Johnson noted that the other two dissenting voices on Wednesday were also regional bank presidents, from Kansas City and Cleveland.

Rosengren, 59, became a voting member of the Federal Open Market Committee, which sets rates, again this year. The committee is typically made up of 12 voting members, with one-year rotating seats for the regional bank presidents.

The Fed in its statement characterized the near-term risks to the economy as ‘‘roughly balanced.’’ It was the first time it has used that wording since December, when it last raised rates. Most analysts have said they think the Fed will next raise rates in December of this year.

Until recently, many Fed watchers had thought a rate hike was likely this week. They believed that the Fed, starting with a late-August speech by Yellen in Jackson Hole, Wyo., was preparing investors for an imminent increase.

Yellen suggested then that, given the job market’s solid gains and the Fed’s outlook for the economy and inflation, ‘‘the case for an increase in the federal funds rate has strengthened in recent months.’’


Sentiment shifted, though, after Lael Brainard, a Fed board member and Yellen ally, made the case for delaying a resumption of rate increases. Brainard’s comments, coupled with a string of weaker-than-expected economic data, led watchers to conclude that there would probably be no rate increase this week.

Job growth slowed in August. A manufacturing gauge slid back into recession territory. An index that tracks the services economy, in which most Americans work, fell to its lowest level since 2010. And US shoppers retreated in August to depress retail sales after four straight monthly gains.

These were signs, too, that the economy might be struggling to accelerate after three straight quarters of anemic growth.

And perhaps most critical for some Fed officials, inflation has yet to make significant progress in rising toward the central bank’s 2 percent target range.

The Fed’s statement on Wednesday was issued hours after the Bank of Japan, struggling to rejuvenate an ailing economy there, set a more ambitious goal for raising inflation and announced steps meant to raise the profitability of financial firms.

Analysts expressed doubt, though, that the Bank of Japan’s new target would change the mindset of shoppers and businesses long used to a stagnant economy and flat or declining prices. They said they expected Japan’s central bank to eventually slash its policy rate further.

The Bank of England decided to keep British rates unchanged last week. The United Kingdom’s economy is holding up better than expected after Britain voted in June to leave the European Union.


The so-called Brexit decision caught financial markets by surprise and generated alarm about the prospects for Britain’s economy. In August, the Bank of England cut rates and expanded its stimulus program. But it decided to leave its main rate unchanged this month.

Material from the Associated Press was used in this report. Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.