[1]Boston Fed [2] President Eric Rosengren stated in an address [3] at the Greater Boston Chamber of Commerce that the Fed’s recent raising of the federal funds target rate was a milestone, but at the same time, he indicated that future rate increases were likely to be gradual and that it will be important to carefully manage risks to the economy.
Rosengren noted that he hopes further normalization is appropriate, but at the same time the “gradual” approach to raising the rates reflects the current economic landscape. Inflation remains well below the Fed’s 2 percent target rate, stock markets have been weak in other parts of the world, oil and commodity prices have been weak, and GDP growth for the U.S. in the fourth quarter has been slow. On the positive side, Rosengren noted the monthly average of 284,000 jobs added in the last quarter of 2015, including the 292,000 added in December.
Further rate increases will be determined by incoming economic data and how policymakers view that data, he said.
“While monetary policy should not overreact to short-term, temporary fluctuations in financial markets, policy makers should take seriously the potential downside risks to their economic forecasts,” Rosengren said.
Rosengren called the economic recovery “painfully slow” since the recession while noting that improvements to the economy in the last year provided the conditions necessary for the Fed to remove some of the “extraordinary monetary policy accommodation” put in place as a necessary, appropriate, and effective response to the crisis and recession. The Fed’s raising of the rates in December was the first short-term rate increase since the Great Recession. Rates remain well below their pre-crisis levels, however; Rosengren stated that the Federal Open Market Committee “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”