Fed's Rosengren sees Taylor as `flexible' in applying rules

A long-serving Federal Reserve policy maker said he isn’t worried that Stanford economist John Taylor, if nominated to lead the U.S. central bank, would be too severe in seeking to impose his views on policy.

“I think we can work in most frameworks as long as people are pragmatic and practical about how they think about the implementation,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview Saturday, in which he also reiterated his argument for raising interest rates again in December despite low inflation.

Rosengren spoke on the sidelines of a conference in Boston that saw him and Taylor exchange conflicting views over the topic of monetary policy rules.

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Eric Rosengren, president of the Federal Reserve Bank of Boston, looks on as mortgagees arrive at a foreclosure prevention workshop sponsored by the Federal Reserve Bank of Boston and the New England Ptriots Charitable Foundation at Gillette Stadium in Foxboro, Massachusetts, U.S., on Tuesday, Aug. 12, 2008. The number of foreclosures in the U.S. are "growing," Rosengren said in an interview with Fox Business News. Rosengren speaks as some investors are hoping the worst of home-price declines and defaults on home-loans are in the past. Photographer: Neal Hamberg/Bloomberg News

Taylor, 70, is famous for having developed a formula in the early 1990s — since known as the Taylor Rule — for determining a central bank’s appropriate benchmark interest rate. He is said to have met with President Donald Trump this month to interview for the job of Fed chair. Trump is also said to be considering Janet Yellen, the current chair whose term expires in February, Fed Governor Jerome Powell, former Fed Governor Kevin Warsh and White House economic adviser Gary Cohn for the post.

The Taylor Rule currently prescribes a 3.74% federal funds rate, compared with the 1% to 1.25% range now being targeted by the Fed, though the rule’s recommendations vary if the assumptions it uses about the underlying economy are changed.

During the conference, Taylor defended his rule, but said it was never meant to tie the hands of central bankers. He also signaled openness to adjusting his estimate of the neutral rate of interest. A key component in his formula, the neutral rate is the theoretical level for the policy rate that would keep growth on an even keel — which Fed officials say has probably fallen since the 2008-2009 financial crisis.

“His remarks were quite flexible, to be quite honest, which is why I’m not that worried,” Rosengren said of Taylor. “Most people who end up being the chair, no matter who they are, tend to be a little bit more flexible in their thinking when they’re actually making the decision.”

Rosengren has led the Boston Fed since 2007, making him one of the longest-serving members of the policy-making Federal Open Market Committee.

In the interview, Rosengren said continued gradual rate increases were needed because tightening labor markets will lift wages and prices.

“If we push the labor market too far, we’ll start seeing more of a reaction” in wages and prices, Rosengren said in the interview. “I don’t think the rule of supply and demand as it relates to labor no longer apply.”

Most members of the Federal Open Market Committee signaled after their meeting last month that they still back a hike in December. Minutes of the meeting showed, however, that several are worried about inflation and said their December call will be influenced by data arriving over the next two months. Yellen, who spoke on Sunday in Washington, said her “best guess” was soft inflation would not persist and further gradual rate hikes were warranted due to the ongoing strength of the U.S. economy.

Rosengren said it’s “not at all unimaginable” that unemployment could push below 4% in 2018. Joblessness is not likely to stay below 4% for long, he said, and once it begins rising it will be very difficult for the Fed to keep it from spiking again.

“I want something that is more sustainable over time,” he said. “We need to be thinking about what it’s going to look like a year down the road and not just what it looks like right now.”

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