Barring surprise, Rosengren expects Fed to move ‘a bit faster’ on hikes

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Unless events change the economy, the Federal Open Market Committee will likely need four 25 basis point rate hikes this year, Federal Reserve Bank of Boston President Eric Rosengren said Friday.

“[D]evelopments since December generally reinforce my view of the need for somewhat more removal of accommodation than was reflected in the December median Summary of Economic Projections (SEP),” Rosengren said in a speech in Springfield, Mass., according to prepared text released by the Fed. “Of course, following through on this expectation is conditional on the economy unfolding about as expected, and that unexpected events such as a trade war or a substantial change in the geopolitical situation do not surprise on the downside.”

The estimate is based on the low unemployment rate, a gradual rise in wages and salaries, and expectations inflations will move close to or hit the Fed’s 2% target by yearend.

As the economy continue to improve, he said, “monetary policy remains accommodative, and fiscal policy has just become quite a bit more stimulative.”

The risk of “providing too much stimulus from either monetary or fiscal policy at this stage of the economic cycle could threaten to create a so-called ‘boom and bust’ economy, which policymakers certainly want to avoid,” Rosengren noted. “To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace – and perhaps a bit faster than the three, one-quarter point increases envisioned for this year in the assessment of appropriate policy from the December 2017 FOMC meeting. This expectation assumes, of course, the data continue to come in more-or-less consistent with my outlook.”

Separately, in a speech in Lincoln, Neb., on Thursday evening, Federal Reserve Bank of Kansas City President Esther George said the FOMC must keep raising rates because “monetary policy remains highly accommodative, and the recently enacted tax cuts and federal government spending increases suggest fiscal policy has turned more stimulative.”

George decried how slowly balance sheet normalization has progressed, noting it “may still be contributing to a buildup of various financial imbalances.” Although markets had been stable recent volatility “is not uncommon … “when asset prices become inflated and investors struggle to find a new equilibrium.”

While “monetary policy can be a useful tool to lean against the ups and downs of the business cycle, but it is not well suited to address structural problems in the economy such as job polarization,” she said.

“But the current setting of our target interest rate is still well below neutral,” George noted. “It is, therefore, important that the FOMC continue on its current path of policy normalization with gradual increases in the target federal funds rate.”

Neither Rosengren nor George are FOMC voters this year.

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Monetary policy Eric Rosengren Esther George Federal Reserve Federal Reserve Bank of Boston Federal Reserve Bank of Kansas City FOMC