Rosengren Advocates Hiking Every Other Meeting

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Four rate hikes this year, one at every other meeting, would still be a gradual rate of increase, Federal Reserve Bank of Boston President and CEO Eric S. Rosengren said Wednesday.

"I view four increases this year as fully consistent with comments from [Federal Open Market Committee] participants stating that the path of normalizing rates will be gradual," Rosengren said according to prepared text of a speech he was to deliver before the Boston Economic Club. "Clearly, such a pace would be slower than the previous tightening cycle, beginning in June of 2004, when the FOMC increased interest rates at each meeting for 17 meetings."

In addition to advocating four hikes this year, Rosengren suggested, "My own view is that an increase at every other FOMC meeting over the course of this year could and should be the committee's default, unless economic data come in inconsistent with forecasts."

This differs from the perception is the FOMC rate hike depend on "nuances of incoming data, with the base case being no change in rates."

But Rosengren noted he still wants hikes to be part of "a fully data-dependent approach, not a preset path, as it would hinge on the incoming data – but the base case would be four tightenings, reflecting the strength of the economy that I believe justifies more regular normalization of interest rates."

"Such a gradual, but more regular, tightening of rates is consistent with both the improved 'starting' conditions and the continued good news about the economy," he said.

The Fed should have achieved its dual mandate by yearend, Rosengren said, but still the federal funds rate is less than 1 percent, while inflation approaches 2%. This means a "negative real interest rate (simply because the inflation rate exceeds the nominal interest rate). While it is not unusual to have negative real interest rates when the economy is quite weak … it is unusual to still have negative real interest rates late in a recovery when the economy is close to full employment and nearing the inflation target."

Should the economy overheat, because the fed doesn't raise rates quickly enough, "it could ultimately require a less gradual monetary policy adjustment – which could potentially place at risk the significant progress the economy and labor market have made since the Great Recession," Rosengren noted.

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