With "significant" labor market slack remaining, policymakers must be "patient" in removing monetary policy stimulus Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Friday.
"My primary message is that significant [labor market] slack remains, and thus monetary policy needs to be patient in removing stimulus," he told a conference in Boston, according to prepared text released by the Fed. "In addition, given the uncertainties surrounding our forecasts of the pace of labor market improvement and the degree of remaining slack, monetary policy has to be determined largely by incoming data and the signals that data provide about the health of labor markets. If the economy disappoints we should be in no rush to raise short-term rates, but if the economy improves more quickly than anticipated we should raise short-term rates earlier. Thus, we should be moving away from providing date-based forward guidance, and instead focus on what incoming data tell us about reaching full employment and 2 percent inflation within a reasonable time period."
While many "fixate" on the calendar when trying to determine liftoff, Rosengren suggested the Fed stop issuing guidance on the approximate timing of monetary policy changes.
"I do not intend this to reduce transparency in monetary policymaking," he explained. "Rather, I simply want to acknowledge that any reference to calendar dates has the potential to be inaccurate."
Further, Rosengren stressed, liftoff will be based on economic improvement, especially employment and the path of inflation.
"We are getting close enough to targets that, given the uncertainty around forecasts of these variables, incoming data that cause Federal Reserve policymakers to significantly change our outlook for the economy will shift any expected lift-off date forward or backward in time," he noted.
Also, he noted, many indicators have not behaved as expected, specifically GDP has been weaker than forecast and the unemployment dropped quicker than expected.
The Boston Fed estimates that 5.25% unemployment would translate to full employment, a number that is expected to be reached mid-2016.
"As I've said on many occasions, I personally do not expect that it will be appropriate to raise short-term rates until the U.S. economy is within one year of both achieving full employment and returning to within a narrow band around 2 percent inflation," Rosengren reiterated. "And, if one were to also assume that tightening would begin roughly one year before reaching full employment and the 2 percent inflation target," then a mid-2015 target would "seem roughly consistent with the forecasts."
Rosengren cautioned, "there is significant uncertainty surrounding these forecasts."
