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Boston Fed’s President Makes Case for Interest Rate Hikes
By BINYAMIN APPELBAUMOCT. 16, 2017

BOSTON — Eric Rosengren, president of the Federal Reserve Bank of Boston, was a leading advocate for the Fed’s economic stimulus campaign after the financial crisis. Lately, he has been equally outspoken in arguing that the Fed must continue to raise its benchmark interest rate even though inflation remains sluggish.

Mr. Rosengren, perhaps the Fed official whose views most reliably approximate those of Janet L. Yellen, the Fed chairwoman, argues that inflation will rebound as unemployment continues to fall. He also argues that raising rates slowly could prolong the economic expansion by averting any need to raise rates quickly.

In an interview on Saturday at the Boston Fed’s annual conference, Mr. Rosengren said he favored raising the Fed’s benchmark rate later this year, and that the rate should rise to about 2 percent by the end of 2018.

The conversation began on a broader subject: Policy rules. Republicans want the Fed to adopt a formula for moving interest rates up and down. Randal Quarles, sworn in Friday as the Fed’s vice chairman of supervision, favors that approach. So do some of the candidates to become the Fed’s next chairman.

The transcript has been edited for length and clarity.

Q. You opened this conference by offering your own judgment on policy rules, saying they should essentially be used as benchmarks and guidelines, but that it would be a mistake for the Fed to choose a rule and follow it.

A. A number of papers at the conference highlighted that some of the economic relationships that are frequently assumed to be stable over time have proven to be not so stable as we have come out of the financial crisis. These structural changes mean that if you tried to have a model that was fairly invariant to these changes, or a process that was invariant to these changes, there would start being big misses in monetary policy.

So I think a more flexible approach, that thinks about not one particular rule but a lot of rules, and does ask ‘Are we behaving quite differently than we have historically? And, if so, why?’” — I think that’s a good discussion to have. We should have it with the public; we should have it with each other.

Q. On the other hand, you argued in a recent speech the Fed has put too much emphasis on short-term fluctuations when adjusting long-term estimates, like the natural rate of unemployment.

A. So assuming it’s a constant is not good and assuming that it moves too much is not good. That’s where judgment comes in. I would say particularly the natural rate of unemployment has tended to go up when we’ve had high unemployment rates and go down when we’ve had low unemployment rates. And that’s the situation we’re in right now, where the unemployment rate is at 4.2 percent and people’s estimate of the natural rate has been coming down. I think if you look back over time those frequently are mistakes — that we move too much. That doesn’t mean you shouldn’t move, but it shouldn’t change abruptly and substantially over a short period of time.

Q. The Fed’s sensitivity to those short-term fluctuations are an effort to explain why inflation remains sluggish. You’re rejecting the explanation but not offering an alternative.

A. A mystery is unsatisfying. You always like to have an end to the book. My own view as of now would be that, more than likely, we’re going to find that it’s temporary. We’re seeing wages and salaries go up. That’s consistent with a labor market that’s gotten tight enough that it’s starting to be reflected in wages and salaries. If a year from now you’re at the conference and we’re still undershooting on inflation and wages and salaries went down, then I have to come up with another explanation. I’m not expecting that.

Q. So the Fed should keep raising its benchmark rate?

A. If at the end of the next year we were at the point where inflation was around 2 percent and the unemployment rate was below 4 percent, I’d be concerned if we hadn’t moved to remove accommodation.

Q. It’s hard to know what to make of the Fed’s forecasts given that the central bank’s leadership could change completely in the next few months.

A. Chairs do matter. But it is a committee that’s making this decision. I wouldn’t expect a dramatic divergence from what we’ve been doing over the recent period. The staff stays the same, the presidents stay the same. We’ll have some new governors but I would be surprised if there are dramatic shifts in what we’re doing. I think it’s more likely we would see changes over time if there was somebody that had a different view about what we should be doing, and other governors with that same view came onto the committee. But I agree it’s harder to forecast what monetary policy will be when you don’t necessarily know who the chair or some of the governors will be in key slots, including the vice chair.

Q. Where should the interest rate be at the end of 2018?

A. If the data comes in as I’m expecting, that would be consistent with having something much closer to 2 percent on the federal funds rate.

Q. And that march toward 2 percent with a rate hike by the end of 2017?

A. Unless the data turns out otherwise, based on what I’m expecting I would think that a rate increase by the end of the year would be appropriate.

Q. Would you oppose a more rapid change in the course of monetary policy?

A. As long as inflation is below our 2 percent target there’s no reason to move quickly.

Q. Mr. Quarles says he wants to relax some financial regulations imposed after the 2008 crisis. Does that concern you?

A. There are areas that I could pull back in and areas that I would certainly not want to pull back in. Areas in which I think assessment is probably warranted: The Volcker Rule is a pretty cumbersome rule. Some fresh eyes looking at that actually makes sense.

I would say over all I wouldn’t want to see the capital ratios of our largest institutions go down. So I’m quite supportive of having a very well capitalized banking system that is resilient. I think the stress tests are a key component of that. It’s a fairly significant process that’s expensive for both the Federal Reserve and banks, so I think looking at ways that we could make that process go more smoothly I think is worth thinking about. But the overall idea of making sure that our banks are resilient to very significant stresses that may change over time is, I think, a key component of changes in supervision that we should keep.

If Congress cuts taxes, should the Fed raise rates more quickly?

It depends on the nature of what actually gets changed. If you can credibly believe that the productive capacity of the country is going to change as result of the way they do the tax cuts, you might view that as a positive. If you have a lot more workers coming back into the labor force and you have firms that are doing a lot more capital investment, that’s a situation where there’s some very big positive spillovers from the change in the policy. But you can easily imagine something that doesn’t do either of those, in which case I would be more concerned that it would be adding to aggregate demand, which seems strong enough now.

https://www.nytimes.com/2017/10/16/us/politics/federal-reserve-interest-rates.html?