The nation’s central bank will quicken the pace of rate increases this year, with the US economy at full employment and inflation expected to climb to healthier levels, according to Eric Rosengren, president of the Federal Reserve Bank of Boston.
Given that the economy has “shown remarkable progress,” the Federal Reserve should be able to back off the extraordinary measures it took during the financial crisis and return to a more normal monetary policy, Rosengren said at a meeting Monday of the Connecticut Business & Industry Association in Hartford.
“I expect that appropriate monetary policy will need to normalize more quickly than over the past year,” Rosengren said. He cautioned that the Fed is unlikely to move as fast as it did during the last cycle of credit tightening in 2004-2006, when policy makers raised a key short-term interest rate by a quarter of a percentage point 17 times. Fed members have said they expect to raise rates three times this year.
“I believe that a still gradual but somewhat more regular increase in the federal funds rate will be warranted,” he said.
Rosengren spoke publicly for the first time since his one-year rotating term as a voting member of the Federal Open Market Committee, the central bank’s monetary policy-making group, ended in December.
Rosengren defended the Fed’s actions in recent years, even as Donald Trump, a vocal critic of the central bank’s policies, prepares to be sworn in as the next president. Trump has blasted Fed chairwoman Janet Yellen and accused the board of keeping rates near zero to help President Obama and the Democrats.
The Federal Reserve increased rates in December by a quarter of a point to between 0.5 and 0.75 percent, only the second time it has done so since 2008.
Rosengren said the Fed’s actions during the financial crisis and in the years after have helped ensure that the US economy recovered faster than its global counterparts.
“The aggressive policy actions taken by the Fed during the financial crisis and recession made a huge difference,” Rosengren said. “Our economy would not be as healthy as it is and we would thus not be near a tightening cycle now if we hadn’t been so aggressive then. As a result, the US is closer to achieving its goals for monetary policy than are most other developed countries.”
Both Japan and the European Central Bank have slashed interest rates into negative territory to jump-start their economies and encourage lending by charging banks to hold money.
But Rosengren said in the United States he sees labor markets improving, wages increasing, and prices for goods reaching desired levels that would indicate a healthy economy.
Rosengren said it’s too early to know how Trump’s economic plans could change the pace of rate increases. Trump has called for tax reductions and $1 trillion in infrastructure spending that would act as a fiscal stimulus.
But in a separate interview on Monday, Rosengren said Congress should be judicious in funding infrastructure projects and ensure that they are necessary and have a high return. There is no need for the sort of “shovel-ready projects” undertaken during the recession to provide immediate jobs, he said.
“We’re at full employment. We don’t need a lot of stimulus for that sort of reason,” Rosengren said. “We should care what the projects are.”
John Williams, the president of the San Francisco Fed, went even further in an interview with the Financial Times on Friday.
Williams said that considering the marked improvements in the economy, Congress doesn’t need to approve a short-term fiscal stimulus plan. Williams, instead, advised lawmakers to focus on policies that will boost productivity in the long run and get the budget deficit to sustainable levels.
“I don’t think we need short-term fiscal stimulus,” Williams said. “What we need is really better policies and investments in the long-term health of the economy.”
Atlanta Fed chief Dennis Lockhart, who is retiring at the end of next month, also weighed in on Monday and said that any fiscal stimulus would likely push the central bank to raise rates by a quarter point three times this year.Deirdre Fernandes can be reached at firstname.lastname@example.org. Follow her on Twitter @fernandesglobe.