Targeting low inflation, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren Tuesday suggested the Federal Reserve should wait to raise rates.
Noting the Fed said policymakers must be "reasonably confident" inflation will hit the 2% target in the medium term, Rosengren said "data have not been as clear-cut" as labor market improvement.
He pointed to 1.2% core inflation over the past 12 months, lower oil and commodity prices and failure of wages and salaries to grow.
"As a result, current data have yet to indicate that this second condition will be met in the coming months; instead, policymakers will need to rely on forecasts of inflation," Rosengren told the Forecasters Club of New York according to prepared text released by the Fed.
And forecasts have consistently called for rising inflation, which has yet to develop, he noted.
"In effect, then, my view of the forecast for higher inflation rests largely on whether I think the economy will continue to experience growth above potential, and whether the subsequent declining labor market slack will be sufficient to raise my confidence that inflation will return to 2 percent in a reasonable time frame," he said.
"Such a forecast needs to be mindful of recent developments, including data that suggest the slowing of foreign economies, coupled with volatile stock prices and falling commodity prices - both of which are consistent with a weaker global economy. In my view, these developments might suggest a downward revision in the forecast that is large enough to raise concerns about whether further tightening of labor markets is likely," Rosengren said. "And without an expectation of growth above potential and further tightening of labor markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2 percent target within a reasonable time frame. Indications of a much weaker global economy would at least increase the uncertainty surrounding policymakers' economic growth and inflation forecasts."
Rosengren predicted tightening, when it occurs, will differ from prior cycles due to low inflation and slower GDP growth than in 1994 and 2004, as well as unemployment differences.
Further, the tightening cycle will be more gradual and end at a lower federal funds rate than previous cycles.
