Investors are too gloomy, but the Federal Reserve should raise interest rates only if future data show the economy in danger of overheating.
That’s the view of Eric Rosengren, president of the Federal Reserve Bank of Boston. While he is a widely respected economist, Rosengren’s opinion takes on added importance this year because he is returning as a voting member to the Fed committee in Washington, D.C., that sets interest rate policy.
“I personally suspect that financial market sentiment may have become unduly pessimistic,” Rosengren said in remarks prepared for a speech Wednesday at the Boston Economic Club. “Economic growth was quite strong in 2018, and some of that strength is likely to carry forward.”
But in a shift in tone from October, when he said the Fed would likely be forced to gradually make credit harder to get, Rosengren added an important caveat in his first speech this year.
“I do view the current economic outlook as being quite uncertain. Even at the best of times, it is difficult to navigate soft landings for the economy,” he said. “Recent data from China’s economy, the potential for increased trade tensions, and heightened volatility all counsel for policy to be both flexible and patient.”
Flexible and patient. Rosengren was relaying the mantra Fed chairman Jerome Powell wants investors to repeat whenever they think the central bank is about to send the economy into a tailspin by blindly jacking up rates too fast or too high. It was just that fear, along with concerns about the US-China trade fight, that recently sent stock prices tumbling.
After a two-day meeting of the policy-making Federal Open Market Committee in December, the Fed raised its benchmark interest rate another quarter percent with the aim of keeping inflation in check. Powell previously signaled that the central bank could raise rates twice this year, but has since emphasized that he and his colleagues will act only if necessary.
That stance was confirmed in the minutes from last month’s meeting, which were released Wednesday after the customary delay.
“Many participants expressed the view that, especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming,’’ the notes from the meeting said. “Participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.”
After a lot of skeptcism, investors appear to be taking the Fed at its word. From the beginning of October to the end of December — the height of the trade war-rate hike fears — the Dow Jones industrials fell 12.5 percent, while the S&P 500 index dropped 14.3 percent. Since Jan. 1, the S&P has risen 3.1 percent, and on Wednesday it rose for the fourth straight day — by 0.4 percent — the longest winning streak since mid-September.
Rosengren, who has run the Boston Fed since 2007, is known as a hawk on inflation. In September 2016, when interest rates were still near historic lows eight years after the financial crisis, he argued for the Fed to tighten credit to keep prices under control. The Fed did just that in December of that year and has since raised rates seven more times, though they still remain below what are considered normal levels.
The Federal Open Market Committee has 12 members — the seven members of the Fed’s Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. Rosengren was last a voting member in 2016. In the years the regional Fed presidents aren’t voting, they still participate in meeting discussions. The committee has eight regularly scheduled meetings a year. The next is Jan. 29-30, but no action on rates is expected.
While Rosengren sees the economic glass half full, he said now is the time for the Fed to step back and wait to see what happens.
“My current expectation,’’ he said in his speech Wednesday, “is that the more optimistic view will prevail, with economic outcomes consistent with the more upbeat forecasts (and stock markets perhaps rebounding). Yet given the reduced certainty I have about my forecast — in light of the slowing abroad and volatile financial markets — in my view, the appropriate stance for monetary policy is, for now, to not have a bias on moving policy in either direction until there is greater clarity around economic trends here and abroad. The Federal Reserve’s current monetary policy seems appropriate for now, and can patiently observe future economic developments.”
Repeat after me: flexible and patient.