• Says weak jobs report shows Fed was right to delay hike
  • Boston Fed president cuts full-employment estimate to 4.8%

Federal Reserve Bank of Boston President Eric Rosengren said the U.S. economy needs to be growing at a 2 percent pace in the second half of the year to justify an interest-rate increase by December.

The slower rate of job gains in September and weaker exports validated the Federal Open Market Committee’s concerns about international growth when it decided not to raise interest rates at its September meeting, Rosengren said.

Eric Rosengren
Eric Rosengren
Photographer: Jessica Rinaldi for The Boston Globe via Getty Images

“It looks like that was a pretty good decision,” Rosengren said in an interview Saturday at the Boston Fed. “The data that we got from the employment report, and also the data that we got from the trade sector, has indicated that we are facing some headwinds” from the slowdown in the economies of U.S. trading partners and a stronger dollar, he said.

The Boston Fed chief said the decision to raise interest rates in the final three months of this year will probably hinge on how much slowing growth abroad is offset by U.S. consumption and gains in housing. The central bank has two more policy meetings in 2015, in October and December.

So far, American consumers are holding up. Household spending climbed more than forecast in August, and car sales in September jumped to the highest in a decade. Demand for new homes in August was the strongest in seven years.

“The question is whether with the incoming data that we start seeing something weaker than 2 to 2.5 percent, in which case then I would be less confident” about raising rates this year, Rosengren said.

Cutting Forecasts

That threshold may not be easily achieved. Economists at JPMorgan Chase & Co. last week lowered their third-quarter growth forecast to 1.5 percent from 2 percent after preliminary trade figures showed exports slumped in August.

Firming Currency Hurting U.S. Exports
Firming Currency Hurting U.S. Exports

Friday’s jobs report may have also shaken some of that confidence in strong second-half growth. Employers added 142,000 workers to payrolls in September, falling below even the lowest estimate of 96 economists surveyed by Bloomberg. Revisions also cut 59,000 from hiring levels previously reported for July and August.

Still, Rosengren said he’s keen to start raising rates early enough so the committee can proceed cautiously after liftoff.

Gradual Tightening

“If we have to tighten quickly, the probability of making a mistake goes up,” he said. “When you’re moving very quickly, you tend to overshoot and can end up slowing down the economy much more than if you have a very gradual pace.”

Rosengren will be a voting member of the Fed policy panel in 2016.

“If we do see 2 percent to 2.5 percent growth in the economy for the second half of the year, that should be sufficient to get some gradual improvement in labor markets,” he said.

Rosengren added that his own estimate of a jobless rate that would be consistent with full employment is 4.8 percent, below September’s reading of 5.1 percent. Full employment is the level of joblessness that would be expected to keep prices rising at the Fed’s 2 percent goal. Some additional job gains would make him “reasonably confident” that inflation would pick up over time, he said.

Level approaching Rosengren's `full employment'
Level approaching Rosengren's `full employment'

The U.S. has undershot the Fed’s inflation target for more than three years. The personal consumption expenditures price index, the central bank’s preferred gauge, rose 0.3 percent for the 12 months ending August.

The Fed should “probe” to see how low the jobless rate can go as it tries to reduce labor market slack and find some resiliency in wages, Rosengren said. “I think that is exactly what we are doing.”

The central bank has held its benchmark federal funds target rate near zero for almost seven years. The probability of a rate increase by December, based on pricing of fed funds futures contracts, dropped on Friday after the jobs report, to 33 percent from 43 percent. Calculation of the probability assumes the effective fed funds rate will average 0.375 percent after an increase.

Rosengren, 58, joined the Boston Fed in 1985 as an economist, and became its president in July 2007. He spoke after hosting an Oct. 2-3 conference at the bank entitled “Macroprudential Monetary Policy.” It was a contentious theme because some attendees, including Lars Svensson, a former deputy governor of Sweden’s central bank, argued against using monetary policy in the pursuit of financial stability goals.

Fighting Bubbles

Donald Kohn, a former Fed vice chairman who is now a member of the Bank of England’s Financial Policy Committee, warned that using monetary policy to lean against asset bubbles could involve “major costs” to employment and inflation.

Stanley Fischer, the Fed’s current vice chairman, said the argument that using regulatory tools would be a better approach “is persuasive, except when there are no relevant macroprudential measures available.”

Rosengren said U.S. policy makers “do have to take financial-stability concerns into account” as they continue to hold rates at record lows. He said he agreed with Fischer, who said at the conference that there isn’t much evidence of asset bubbles being created right now.

“You do see some real-estate markets that are a little bit on the frothy side --Washington, San Francisco and Boston all come to mind,” Rosengren said. But the Fed doesn’t have to the tools to target real-estate values regionally, he said.

“What would concern me is what happened more in 2004-05, where prices were going up very rapidly not in a few cities but just about everywhere,” he added.

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