Inflation Rate and International Developments Are Areas of Economic Uncertainty

Federal Reserve Bank of Boston President Eric Rosengren discussed monetary policy and areas of uncertainty that effect economic forecasts in the United States Friday in a speech at the Rocky Mountain Economic Summit in Victor, Idaho, according to an announcement from the Boston Fed.

One area of economic uncertainty Rosengren discussed in his speech was the current inflation rate of 1.2 percent, which is well below the Fed's target rate of 2 percent. Even as labor markets have improved, data on core inflation have remained weak; the Federal Open Market Committee has stated that there must be reasonable conference that inflation will reach the 2 percent goal over the medium term in order for the Fed to begin to increase short-term rates.

Rosengren said slack in the labor market, or excess supply, may exist despite the recent decline of the unemployment rate to 5.3 percent, which may be a reason why the inflation rate remains subdued. The employment-to-population ratio may be evidence of slack in the labor market, though some of the slack can be attributed to changes in demographics, according to the Boston Fed.

A second area of economic uncertainty is international developments, according to Rosengren, and he used Greece's current situation as an example of how international events that are difficult to predict can make the future course of the U.S. economy difficult to forecast.

"The situation also calls for some sober reflecting on how best to preserve financial stability, in all parties' interests," Rosengren said. "I would underline the desirability of Greece and its creditors finding a reasonable compromise, which would not only help Greece but would avoid some unintended consequences for all parties in the Euro Area."

Since global geopolitical issues and concerns have not significantly altered economists' outlook for the economy in the U.S., Rosengren expects inflation to move closer to the Fed's target rate of 2 percent for the remainder of the year – which will make it appropriate for the Fed to consider starting to normalize monetary policy, according to the Boston Fed. Rosengren said he believes that monetary policymaking should be particularly data dependent as the Fed gets close to dual mandate goals, which are stable prices and maximum sustainable employment.

To view the full text of Rosengren's speech, click here. To view figures and comments from Rosengren on economic uncertainty, click here. To view figures, click here.