Sunday, October 23, 2016
Sunday, October 16, 2016
Boston Fed president sees unemployment rate dropping to 4.5% next year
The Fed’s latest economic forecast sees interest rates a little above 1% by the end of next year and just under 2% in 2018.
“My own view is that if the unemployment rate falls as much as I’m expecting, then it is possible that we’ll have to raise rates faster than the summary of economic projections,” Rosengren said in an interview with CNBC.
The Boston Fed president was one of three dissenters at the September Fed meeting, wanting the central bank to lift interest rates by a quarter percentage point.
The Boston Fed president said some new research has cast doubt on whether disaffected workers will continue to return to the labor force and keep the unemployment rate from falling.
Traders have priced in a small chance that the Fed will move at its next meeting on Nov. 1-2 given that it is six days from the presidential election. At the same time, investors have priced in a greater than 60% chance of a rate hike at the Fed’s December meeting, when Fed Chairwoman Janet Yellen is scheduled to hold a press conference.
“To me that seems quite appropriate,” Rosengren said Friday. “We have tended to move around the time the Fed chair has a press conference,” he added.
Read: Fed hold rates steady for the time being
Rosengren noted in the interview that his outlook for the pace of interest rate hikes is also faster than the market has priced in.
He said he was concerned that the 10-year Treasury rate TMUBMUSD10Y, -0.39% and the commercial real estate capitalization rate are at historic lows. The 10-year rate “is roughly at where we think inflation is right now. It is quite a low rate,” he said.
This low rate suggests investors have no confidence in the Fed’s ability to offset weak growth, the Boston Fed president said.
“So the fact that long rates are so low, and that there are some sectors of the economy that we’re starting to see very rapid asset growth—like commercial real estate, is a source of concern as people start moving to try to get higher returns because we’ve had low rates for a long period of time,” he said.
The Fed could use its balance sheet to steepen the yield curve if one was worried about potential financial stability concerns from these low rates, he said.
“If one were concerned about the historically low 10-year Treasury and commercial real estate capitalization rates, perhaps because of potential financial stability concerns, the balance sheet composition could be adjusted to steepen the yield curve,” he said.
This suggests that Rosengren is in favor of using the balance sheet as a tool for policy, either buying or selling securities to raise long-term rates.
The Boston Fed president did not elaborate on his comment. Most Fed officials have come out in active use of the $4 trillion balance sheet. They have supported a plan to gradually let the balance sheet shrink but not until short-term interest rates are about 1% and the expansion is on firmer ground.
In her recent speech on the Fed’s policy tools in Jackson Hole, Yellen said uncertainty and potential costs caused the Fed to decide against using the balance sheet