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00:00US. WE GIVE YOU ALL THE CREDIT IN THE WORLD SINCE IT IS RAINING HERE IN BOSTON. IT HAS BEEN A VERY, SHALL WE SAY, VOLATILE YEAR IN 2019 FOR THE FED. WHAT DO YOU THINK YOU HAVE LEARNED ABOUT THE ECONOMY OVER THE PAST 12 MONTHS? MR. ROSENGREN: THERE HAS BEEN A LOT OF VOLATILITY. WE HAVE NOT ENDED UP MUCH DIFFERENT THAN WHAT WE EXPECTED LAST MARCH. IF YOU LOOK AT WHERE OUR FORECAST WAS FOR THE END OF THE YEAR, WE THOUGHT WE WOULD GET GROWTH AROUND 2%, A LITTLE BIT ABOVE. WE THOUGHT WE WOULD HAVE INFLATION RATE AT 2% OR A LITTLE BIT BELOW. AN EMPLOYEE -- AN EMPLOYEE -- AND UNEMPLOYMENT RATE AROUND 3.6%. THAT IS PRETTY MUCH WHERE WE HAVE ENDED UP. DESPITE THE TARIFFS ON THE VOLATILITY THAT HAS OCCURRED IN SOME OF THE FINANCIAL MARKET MOVEMENTS, WE ACTUALLY HAVE NOT ENDED UP IN A VERY BAD PLACE. WE ARE PRETTY CLOSE TO OUR INFLATION TARGET. CORE PCE IS A LITTLE OFF OF WHERE WE WOULD LIKE IT TO BE. WE WANTED TO BE A 2%. UNEMPLOYMENT RATE IS STILL QUITE LOW BY HISTORICAL STANDARDS. IT IS REALLY QUITE LOW. GDP IS GROWING ROUGHLY AT WHAT WE WOULD EXPECT WHICH IS AROUND POTENTIAL ' S. IN TERMS OF ECONOMIC DATA, THE OUTCOME HAS BEEN QUITE GOOD. MIKE: CHAIRMAN POWELL SAID LAST WEEK THE ECONOMY IS IN A GOOD PLACE. WOULD YOU AGREE WITH THAT CHARACTERIZATION? MR. ROSENGREN: I WOULD, IF A WE ARE IN A GOOD PLACE. THE COMPOSITION HAS BEEN DIFFERENT THAN WE EXPECTED. WE EXPECTED BUSINESS FIXED INVESTMENT TO BE STRONGER. WE DID NOT EXPECT CONSUMPTION TO BE SO STRONG. THE IMPOSITION OF THE TARIFFS, THE GLOBAL SLOWDOWN RESULTED IN BOTH EXPORTS AND BUSINESS FIXED AND GET -- INVESTMENT BEING WEAKER THAN WE WOULD HAVE FORECAST. CONSUMPTION HAS PICKED UP AND HAS BEEN STRONG AND WE EXPECT IT TO CONTINUE. MR. ROSENGREN: DO YOU THINK IT WOULD HAVE BEEN THAT WAY WITHOUT THE FED ' S RATE CUTS? YOU DISSENTED ON ALL THREE OF THEM. MIKE: WE WOULD HAVE BEEN SOFTER IN SOME AREAS -- MR. ROSENGREN: WE WOULD HAVE BEEN SOFTER IN SOME AREAS. ONE OF THE CHALLENGES I THINK IS THINKING ABOUT WHAT THE SIDE EFFECTS ARE OF LOW INTEREST RATES. THERE ARE TWO SIDE EFFECTS I AM PARTICULARLY CONTINUING TO LOOK -- TO WORRY ABOUT. ONE IS HOW MUCH WE HAVE IF WE GET A SLOWDOWN AS OPPOSED TO A CONCERN ABOUT A SLOWDOWN. AND I CASE, WE DON ' T HAVE THAT MUCH ROOM BEFORE SHORT-TERM INTEREST RATES WOULD HIT ZERO. THE SECOND CONCERN IS THAT RIGHT NOW, THE STOCK MARKET HAS BEEN DOING QUITE WELL, OTHER FINANCIAL MARKETS IN SOME AREAS HAVE BEEN QUITE APPEALING. THE QUESTION IS IS THIS THE STAGE OF THE CYCLE THAT YOU WANT TO HAVE MORE PUSH TO FINANCIAL MARKETS? I WOULD ARGUE, NOT CERTAIN THAT IS NECESSARY. MIKE: YOU MADE A MAJOR POINT WITH THE BOTH OF THOSE IN A SPEECH LAST WEEK. LET ME ASK YOU ABOUT THE FIRST. YOU ARE BASICALLY SAYING THE FED IS ALMOST OUT OF AMMUNITION. MR. ROSENGREN: I ' M SAYING WE DON ' T HAVE AS MUCH ROOM AS WE HAD BEFORE. PRIOR TO THE LAST THREE EASING ' S, THE FED FUNDS RATE WAS CLOSE TO WHAT I WOULD EXPECT TO BE IS NEUTRAL OVER THE LONG RUN. WE WERE AT 2.4%. SINCE THEN, WE REDUCE THE FEDERAL FUN RATES BY 75 BASIS POINTS. GIVEN THE LEVEL WE WERE AT, THAT WAS ACES -- A SUBSTANTIAL AMOUNT OF EASING. BOTH MONETARY POLICY AND FISCAL POLICY ARE ACCOMMODATIVE RIGHT NOW. I ' M NOT SO SURE WE NEED IT QUITE SO MUCH ACCOMMODATION AT THIS TIME. I ' M A LITTLE WORRIED THAT WE HAVE LESS ROOM THAN WE OTHERWISE WOULD HAVE IF WE WERE TO HAVE A BIG NEGATIVE SHOCK. I WOULD SAY IT IS NOT JUST THE SHORT END OF THE MARKETS OR THE LONG END OF THE MARKET. IT HAS BEEN FLUCTUATING BETWEEN 1.5% AND 2%. THAT IS LOWER THAN WHAT WE WERE EXPERIENCING PRIOR TO THE LAST RECESSION, WHICH MEANS EVEN QUANTITATIVE EASING WILL HAVE SOME LIMITED EFFECT GIVEN THAT COULD QUITE EASILY GET DOWN TO ZERO QUICKLY THEN WE ARE EXPECTING. MIKE: WHAT DO WE DO? MR. ROSENGREN: I THINK WE WILL NEED FISCAL POLICY AT THAT STAGE AND FISCAL POLICY AT LOW INTEREST RATE ENVIRONMENT. FISCAL POLICY BECOMES MORE IMPORTANT TOOL. IN THE TALK I JUST GAVE, IT ALSO HIGHLIGHTED THAT THIS IS A TIME WHERE WE SHOULD BE THINKING ABOUT BUFFERS INCLUDING BUFFERS FOR CAPITAL RATIOS PER BANKS, AND INVENT -- IN GENERAL, FISCAL POLICY, YOU WOULD LIKE TO HAVE A BUFFER IN STATE AND LOCAL GOVERNMENT, ENOUGH A BUFFER THAT THEY CAN WEATHER THE STORM AND HOPEFULLY NOT HAVE TO CUT BACK IF WE WERE TO HAVE A RECESSION. MIKE: YOU LOOK AT WHAT IS HAPPENING IN WASHINGTON THESE DAYS, THERE ' S NO GUARANTEE YOU WILL GET ANY FISCAL POLICY. WHAT WOULD HAPPEN THEN? MR. ROSENGREN: WE WOULD HAVE A LONGER RECESSION THEN WE WOULD PREFER. MIKE: CAN THE FED DO ANYTHING IN THAT CASE, EXCEPT CUT RATES TO ZERO AND DO QE AND CROSS YOUR FINGERS AND HOPE? MR. ROSENGREN: WHEN WE EASE POLICY, IT TAKES SOME TIME TO HAVE AN EFFECT. LOWER INTEREST RATES HAVE AN IMPACT OVER A NUMBER OF QUARTERS. WE WOULD HAVE SOME FLEXIBILITY TO LOWER RATES BOTH AT THE SHORT AND LONG END OF THE MARKET. THAT ' S THE PRIMARY WAY MONETARY POLICY WORKS. I ' M SURE IF IT LOOKED LIKE WE HAD A SEVERE WITH RECESSION, WE WOULD BE CREATIVE WITH OTHER THINGS WE DO. I WOULD HOPE WE DON ' T HAVE TO DO THAT. MIKE: YOU TALKED ABOUT THE MARKETS AND THE TIMING AND CYCLE IN WHICH MISTAKES ARE MADE. ARE YOU CONCERNED ABOUT THAT NOW? MR. ROSENGREN: I ' M NOT PARTICULARLY CONCERNED ABOUT THAT. OBVIOUSLY IN A PERIOD OF A GLOBAL SLOWDOWN, IT IS AN UNFORTUNATE TIME TO HAVE THE TARIFF DISPUTES WE ARE HAVING. IT WOULD BE NICE IF THAT GOT SETTLED QUICKLY. I ' M NOT EXPECTING NECESSARILY TO HAVE A LARGE SHOCK ANYTIME SOON. MY FORECAST IS ACTUALLY FOR MUCH OF WHAT WE HAVE SEEN OVER THE LAST YEAR WHICH IS GROWTH AROUND POTENTIAL, PRETTY TIGHT LABOR MARKETS, AND INFLATION AROUND OUR INFLATION TARGET. MIKE: WHAT IS AROUND OUR INFLATION TARGET MEAN? WE HAVE STRUGGLED TO GET TO THE FED ' S 2% TARGET. DO YOU THINK WE CAN GET THERE AND IF SO, HOW? MR. ROSENGREN: LABOR MARKETS ARE TIGHT. WAGES HAVE BEEN GOING UP. I ' M A PRETTY PATIENT PERSON. I WOULD BE WILLING TO WAIT LONGER FOR THOSE TIGHT LABOR MARKETS TO HAVE AN IMPACT ON PRICES. I DON ' T THINK THERE IS A BIG COST TO BEING A LITTLE BELOW 2%. . I WOULD RATHER BE HIGHER. BUT I WOULD NOT WANT TO DISTORT FINANCIAL MARKETS IN ORDER TO GET THAT OUTCOME. I THINK WE ARE LOOKING AT JAPAN AND EUROPE WHERE THEY HAVE ACTUALLY PUSHED THEIR RATES A VERY, VERY LOW IN ORDER TO MEET THEIR INFLATION TARGET. IN FACT, IT HAS BEEN NEGATIVE IN PLACES LIKE GERMANY AND JAPAN. I ' M NOT SURE THAT IS A CONSTRUCTIVE POLICY. I THINK WE SHOULD THINK ABOUT HOW MUCH WE WANT TO DISTORT FINANCIAL MARKETS TO HIT INFLATION TARGETS. IF WE ARE CLOSE TO 2%, I WOULD LIKE IT TO BE ABOVE 2% RIGHT NOW. I WOULD NOT REALLY DISTORT FINANCIAL MARKETS TO GET THAT OUTCOME. MIKE: THERE ARE A COUPLE OF PROPOSALS IN THE FED ' S MONETARY POLICY REVIEW. ONE IS AVERAGE INFLATION TARGETING WHERE YOU LET IT RUN ABOVE 2%, IF YOU CAN GET THERE. THE OTHER WOULD BE TO DO A RANGE INSTEAD OF A POINT TO TARGET. WOULD YOU FAVOR EITHER ONE OF THOSE? MR. ROSENGREN: MY OWN PERSONAL PREFERENCE, THIS IS A MATTER OF DISCUSSION, BUT MY PERSONAL PREFERENCE WOULD BE A RANGE. I THINK A 1.5% TO 2% TARGET WHERE DURING GOOD TIMES YOU AIM FOR THE HIGHER PART OF THAT RANGE, AND KNOWING THAT WHEN YOU HAVE ECONOMIC DOWNTURNS, YOU ARE LIKELY TO BE BELOW THAT RANGE, THAT IS HOW YOU END UP WITH A SYMMETRIC 2% INFLATION TARGET. I AM IN FAVOR OF HAVING SOMETHING MORE LIKE A RANGE WHERE WE ARE AIMING FOR 2% OVER TIME, BUT WE ARE IN A 1.5% TO 2% TARGET RANGE. MIKE: I WAS NOT NECESSARILY GOING TO ASK YOU ABOUT PRESIDENT TRUMP BUT HE DID MEET WITH JAY POWELL TODAY. CORDIAL CONVERSATION THEY SAY. THEY SAID THAT THEY DID TALK ABOUT NEGATIVE INTEREST RATES WHICH IS A BIG THING FOR THE PRESIDENT. YOU SAY YOU DON ' T LIKE THEM. DO YOU NOT LIKE THEM IN GENERAL, OR JUST FOR THE UNITED STATES? MR. ROSENGREN: I ACTUALLY DON ' T LIKE THEM IN GENERAL. PARTICULARLY FOR THE UNITED STATES. IN PART BECAUSE OUR FINANCIAL MARKETS ARE A LITTLE DIFFERENT THEN EUROPEAN FINANCIAL MARKETS OR JAPANESE FINANCIAL MARKETS. I DON ' T THINK IT HAS HAD THE DESIRE TO STIMULUS TO GET THE LONG TERM YIELD SO NEGATIVE IN SOME PARTS OF THE WORLD. IT STARTS TO GET DISTORTED BEHAVIOR THAT I DON ' T THINK IS HELPFUL. IN THE U.S., WE HAVE VERY VIBRANT SHORT-TERM MONEY MARKETS. I THINK IT WOULD BE VERY DISRUPTIVE IF WE WENT TO NEGATIVE RATES. I THINK IT IS A POLICY THAT SOME COUNTRIES HAVE TRIED, IT ' S NOT CLEAR IF THOSE COUNTRIES ARE NOT GETTING THEIR INFLATION TARGET. IN FACT, THEY ARE FURTHER AWAY THAN WE ARE AFTER BEING NEGATIVE FOR SOME TIME. I DON ' T THINK SO FAR AT LEAST WE HAVE SEEN MUCH OF A SUCCESS. I THINK IN EUROPE, THEY ARE BEGINNING TO REEVALUATE WHETHER THE NEGATIVE INTEREST RATES HAVE BEEN AS HELPFUL AS THEY THOUGHT. MIKE: WE ARE TALKING WITH BOSTON FED PRESIDENT ARIS -- ERIC ROSENGREN. TO FOLLOW-UP ON THAT, BANKS ARGUE CERTAINLY AGAINST NEGATIVE RATES AND SAY IT DISTORTS THE AIR FINANCIAL INCENTIVES. IN YOUR SPEECH, YOU SUGGESTED YOU ARE CONCERNED ABOUT BANKS, RISK-TAKING AND LEVELS OF CAPITAL. WE HAVE BEEN REASSURED MANY TIMES BY FED OFFICIALS LET THE BANKING SYSTEM IS IN MUCH BETTER SHAPE THAN 2008. HOW WOULD YOU DESCRIBE IT? MR. ROSENGREN: ONE OF THE POINTS OF MY TALK IS IN AN ENVIRONMENT WHERE THE FEDERAL FUNDS RATE IS 4%, AND LONG-TERM TREASURY RATES AS ABOVE THAT, YOU HAVE A LOT OF ROOM BEFORE YOU HIT ZERO IN AN ECONOMIC DOWNTURN. SHOULD YOU HAVE THE EXACT SAME CAPITAL BUFFER IN A WORLD WHERE YOUR FEDERAL FUN RATES IS CLOSER TO 1.6%, AND SO IS YOUR LONG-TERM TREASURY RATING. WE DO CARE ABOUT HOW MUCH ROOM WE HAVE. AND MONETARY POLICY HAS BEEN THE PRIMARY WAY THAT WE HAVE GOTTEN OUT OF RECESSIONS IN THE POSTWAR PERIOD. IF WE ARE IN AN ENVIRONMENT WHERE INTEREST RATES ARE LOWER AND MONETARY POLICY MAY NOT BE ABLE TO PROVIDE AS MUCH STIMULUS, THAT IS AN ENVIRONMENT WHERE OTHER BUFFERS HAVE TO BE LARGER, INCLUDING CAPITAL BUFFERS. WHILE I DO YOU THINK WE HAVE SUBSTANTIALLY INCREASED OUR CAPITAL BUFFERS, IF YOU REALLY THINK WE ARE IN A LOW INTEREST RATE ENVIRONMENT, IF YOU THOUGHT WE WERE IN THE RIGHT PLACE FIVE YEARS AGO, WE PROBABLY ARE NOT IN THE RIGHT PLACE NOW THAT WE THINK INTEREST RATES WILL BE LOWER. MIKE: SHOULD WE HAVE A COUNTER CYCLICAL CAPITAL BUFFER? MR. ROSENGREN: I THINK IT WOULD BE APPROPRIATE TO HAVE A COUNTER CYCLICAL CAPITAL BUFFER. THE ENTIRE IDEA IS YOU WILL HAVE A BIGGER BUFFER RIGHT NOW WHEN FINANCIAL MARKETS ARE DOING QUITE WELL. AND THE ECONOMIC DOWNTURN, YOU WOULD REDUCE THE CAPITAL RATIOS SO YOU DID NOT HAVE TO SHRINK BANK ASSETS. BANKS ARE AN IMPORTANT PART OF HOW MONETARY POLICY IS TRANSMITTED. IF YOU ARE IN AN ENVIRONMENT WHERE BANKS ARE TRYING TO SHRINK, IT IS VERY HARD TO HAVE THE SAME AMOUNT OF STIMULUS AS AN ENVIRONMENT WHERE BANKS ARE NOT CONSTRAINED. I THINK THE COUNTER CYCLICAL CAPITAL BUFFER IS ONE OF THE WAYS TO AVOID THAT PART -- THE PROBLEM. MIKE: I WILL LET YOU GO WITHOUT ASKING A QUESTION FOR OUR SHORT AND FRIENDS. JAY POWELL SAID HE THINKS THE FED HAS THE REPO PROBLEM UNDER CONTROL. DO YOU AGREE? MR. ROSENGREN: I THINK IN GENERAL IT IS UNDER CONTROL. IT WILL BE UNDER CONTROL AFTER WE CONTINUE TO DO ALL THE TREASURY BILL PURPOSES THAT WE HAVE ANNOUNCED. I THINK BETWEEN NOW AND SPRING, WE WILL BE EXPANDING OUR BALANCE SHEET AND THAT SHOULD BE MORE SUFFICIENT TO SOLVE A LOT OF THE DIFFICULTIES WE ARE EXPERIENCING IN SEPTEMBER. MIKE: DO YOU HAVE A NUMBER FOR HOW BIG YOU THINK THE EXCESS RESERVES SHOULD BE? MR. ROSENGREN: I THINK BY THE TIME WE GET TO SPRING, WE WILL PROBABLY HAVE ENOUGH EXCESS RESERVES THAT IT WILL BECOME LESS OF AN ISSUE. MIKE: ERIC ROSENGREN, THANK YOU SO MUCH, PRESIDENT OF THE BOSTON FEDERAL RESERVE.

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Fed’s Rosengren on Economy, Fiscal Policy, Negative Rates

Federal Reserve Bank of Boston President Eric Rosengren discusses the state of the U.S. economy, the need for fiscal policy and capital buffers for banks in the next downturn, and his concerns about the low interest rate environment. He speaks with Bloomberg’s Michael McKee on “Bloomberg Markets: The Close.” (Source: Bloomberg)

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