Rosengren warns Fed may have to increase pace of tightening

The US Federal Reserve may have to tighten monetary policy more quickly than its own forecasts currently anticipate, the Boston Fed's president said on February 15.

The US economy was at or approaching both elements of the Fed's dual mandate for price stability and maximum sustainable employment, Eric Rosengren told an audience in New York. The most recent figures for headline and core inflation, using the personal consumption expenditure price index, were at 1.6% and 1.7% respectively, he noted.

At the same time, January's labour market survey showed unemployment at 4.8%, Rosengren said, only 0.1% above his own estimate of sustainable. It was also the same level as the Federal Reserve's summary of economic projections' (SEP) median forecast for long-run unemployment. This would suggest only "limited room for further tightening in labour markets before one might see more inflationary pressures", he argued.

It would probably be appropriate for the Fed to raise the policy rate "at least as quickly as suggested by the Fed's current SEP median forecast, and possibly even a bit more rapidly", he said.

Rosengren also challenged the idea that official unemployment figures understate the amount of slack in the labour market. A recent decline in the "quits rate" of workers voluntarily leaving their job, as well as the unemployment figures, pointed to a strengthening labour market, he said.

Inflation was "not the only consequence of reaching or exceeding full employment", Rosengren said. Imbalances in the employment rate might also cause asset price bubbles, including in real estate, he warned.

Rosengren's views on labour market tightening are similar to a number of leading Fed officials, including Atlanta Fed president Dennis Lockhart. Other senior Fed officials have argued equally strongly that official statistics understate the US economy's potential for higher employment, notably including Lael Brainard, a Fed governor.

In September 2016, Brainard said the SEP's estimate of long-term sustainable unemployment had fallen from a range of 5.2–6.0% in June 2012 to one of 4.7–5.0% in June 2016. Policymakers "cannot rule out that estimates of the natural unemployment rate may move even lower", Brainard argued.

Both Fed chair Janet Yellen and vice-chair Stanley Fischer have discussed the possibility that labour market slack may be persisting in the market.