The Federal Reserve may be able to increase its fed funds target rate at a pace quicker than markets expect, if the incoming data suggest continued improvement, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Thursday.
"If the incoming economic data continue to be consistent with gradual improvement in labor markets and inflation getting closer to target, the Fed should be ready to gradually normalize interest rates, perhaps at a pace not currently anticipated by the federal funds futures market," Rosengren told the Greater Concord, N.H., Chamber of Commerce, according to prepared text released by the Fed.
Noting the "potential for disruptions" is always a possibility, Rosengren said they should only matter "if they materially change the outlook for the U.S. economy."
"In my view, the market remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data," he said.
If incoming economic data show continued improvement in "both inflation and labor markets, I believe the Federal Reserve should continue with the gradual removal of monetary policy accommodation," he said, adding, "we are approaching full employment, and getting closer to the Federal Reserve's 2 percent target for inflation."
Rosengren said he estimated the natural unemployment rate at 4.7%. "But waiting too long to have more normalized rates risks possibly overshooting on the unemployment rate, and needing to tighten more quickly than would be desirable."
While the April employment report was below expectations, the 160,000 jobs added "reflects what I would consider to be relatively strong payroll employment growth," he said, suggesting 80,000 to 100,000 added jobs a month would be trend.
