Fed May Have to Raise Rates More Than Expected, Fed's Rosengren Says

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03/09/2018 | 06:54 pm

By Michael S. Derby

Federal Reserve Bank of Boston President Eric Rosengren said Friday that the central bank may have to raise rates more than expected this year, in remarks that said recent financial market volatility shows investors coming to terms with this potential path of action.

"To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace -- and perhaps a bit faster than the three, one-quarter point increases envisioned for this year in the assessment of appropriate policy from the December 2017 [Federal Open Market Committee] meeting," Mr. Rosengren said in the text of a speech to be delivered in Springfield, Mass.

Over recent weeks, the outlook for Fed policy has been in flux as officials and market participants are taking on board the fact that the economy may perform better than expected this year. That improved outlook has suggested that the Fed may raise rates more than three times.

Still, officials like the New York Fed leader William Dudley have cautioned there hasn't been some notable change in the path of interest rate policy. "I think that, in my own view, if you were to go to four 25-basis-point rate hikes, I think it would still be gradual," Mr. Dudley said last week in remarks in Brazil.

Mr. Rosengren isn't an FOMC voter this year. He has been a firm advocate of pressing forward with rate rises as a means to keep the economy's momentum in balance. He's sticking to that view.

"The economic data have been quite good, monetary policy remains accommodative, and fiscal policy has just become quite a bit more stimulative," Mr. Rosengren said in his speech.

"While a tight labor market provides definite advantages -- such as employment opportunities for workers who have struggled to find a job -- nonetheless, providing too much stimulus from either monetary or fiscal policy at this stage of the economic cycle could threaten to create a so-called 'boom and bust' economy, which policy makers certainly want to avoid," he said.

Mr. Rosengren said the swoons seen in markets recently reflect a new understanding by traders and investors. He said there has been a "healthy realization" of the risks that confront policy makers are on the up and downside, and that policy will shift depending on how the economy performs.

Mr. Rosengren said weak inflation has likely been tied to "transitory" factors. He noted tightening labor markets have brought a "gradual" increase in wages and salaries, and said "while inflation is still a bit below the FOMC's target, most forecasters expect inflation to rise to, or near, the Fed's 2% target by the end of 2018."

Write to Michael S. Derby at michael.derby@wsj.com

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