Federal Reserve Bank of Boston President Eric Rosengren said Friday the U.S. central bank needs to keep a close eye on overseas events to make sure they don’t upend the American economy and get in the way of raising short-term interest rates later in the year.
“To date, geopolitical issues and concerns around the world have not significantly altered the outlook for an improving U.S. economy,” Mr. Rosengren said. “As the economy continues to improve, I expect that inflation will begin to move closer to (the Fed’s 2%) target, making it appropriate to consider starting to normalize monetary policy later this year,” he said.
But amid fast-moving events in Greece and elsewhere, Fed officials need to make sure trouble abroad isn’t changing the outlook for the U.S. before acting. Before raising the Fed’s short-term rate target off of near-zero levels, central bank officials will need to “get a better handle on how the crisis in Greece gets resolved, so that we can better gauge its potential to impact financial markets and the domestic economy,” he said.
He said in his remarks he currently expects the U.S. to suffer no adverse impact from international issues, and he added he expects that Greece will be able to stay in the European Union as well.
Mr. Rosengren’s comments came from a speech given at the Global Interdependence Center’s Rocky Mountain Economic Summit, held in Victor, Idaho. He spoke as trouble in Greece and the broader European economy, coupled with highly unsettled markets and an economic slowdown in China, have raised questions whether the U.S. economy can continue to grow at a healthy rate. Those anxieties have introduced uncertainty into the timing of a Fed interest rate hike most officials believe is likely for this year.
So far, most Fed officials who have spoken over the last few days remain upbeat the Fed can lift rates off the rock bottom levels where they have rested since the end of 2008. Mr. Rosengren has long argued in favor of caution when it comes to raising rates, pointing to the persistence of weak inflation relative to the Fed’s 2% inflation target.
In his speech Friday, Mr. Rosengren again fretted over low inflation, and what that shortfall could mean for the U.S. He noted “the evolution of the domestic economy remains somewhat concerning.”
Mr. Rosengren said that while there has been improvement in an unemployment rate that now stands at 5.3%, it is likely that changes in labor-force demographics among other factors may have lowered the economy’s natural jobless rate to 5%. That level “may need to be adjusted even lower if inflation continues to undershoot our forecasts,” while more broadly, it suggests the job market still has room to run before it starts creating stronger inflation pressures, he said.
The official said he sees little evidence very easy Fed policy is fueling financial market imbalances, and said the Fed has the room to aggressively pursue its price and job market goals right now.
Mr. Rosengren also said in his speech that while Greece is small nation, trouble there runs the risk of creating an outsize impact in financial markets that could touch the U.S., even when Greece has an economy about the size of the state of Connecticut.
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