Market action reinforces need for policy patience: Fed's Rosengren

Mon Oct 20, 2014 5:14am EDT
 
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By Jonathan Spicer

BOSTON (Reuters) - The recent volatility in financial markets reinforces the need for the Federal Reserve to be patient with its policy stimulus and to clearly tie an eventual interest-rate rise to improving economic conditions, a top Fed policymaker told Reuters.

Boston Fed President Eric Rosengren said that while it would take a few more weeks to understand the real economic fallout from the market selloff, he could "easily imagine" a scenario in which the U.S. central bank keeps rates near zero until 2016.

The sharp week-long drop in global stocks and bond yields abated on Friday, though investors remained on edge over increasing signs of a stumbling European economy and weakness in China and Japan. Amid the financial turmoil, futures traders placed bets on a later Fed rate hike toward the end of 2015.

"Patient monetary policy probably makes sense," Rosengren, a dovish Fed official, said in an interview over the weekend. "Certainly the events of the last couple of weeks probably give some credence to thinking about being patient as well as trying to process some of the movements we're seeing."

The key, he said, will be identifying any weakness in broader U.S. inflation and workers' wages, and not simply reacting to turbulence in markets like inflation-protected Treasuries, known as the TIPS breakeven rate.

Rosengren predicted the U.S. unemployment rate will fall to around 5.25 percent, from 5.9 percent now, by about the middle of 2016. He repeated that a rate rise should come about a year before that "natural" level of joblessness is reached, assuming inflation had risen to near a 2-percent target.

"If it starts looking like what we're seeing in financial markets is reflective of more underlying, real trends then there is reason for being more patient (on policy). I don't think we have that evidence today," Rosengren said on the sidelines of a Boston Fed conference on economic inequality.

Fed officials meet Oct. 28-29 to decide whether to shelve a stimulative bond-buying program as planned, and what language to use to telegraph when they will raise borrowing costs. The Fed currently says it will wait a "considerable time," though Rosengren and others want a more data- and less date-dependent policy statement.   Continued...

 
The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks during the "Hyman P. Minsky Conference on the State of the U.S. and World Economies", in New York, April 17, 2013. REUTERS/Keith Bedford