NEW YORK (Reuters) - Cool inflation and a hot jobs market are putting the Federal Reserve’s policy goals at odds, but there is “no clarion call” to push interest rates either way as trade risks lurk, a top policymaker said on Tuesday.
“Today, the two elements of the Fed’s mandate are sending opposing signals for monetary policy, with low unemployment perhaps suggesting a bit tighter policy, and low inflation the opposite,” Boston Fed President Eric Rosengren said in remarks prepared for delivery to the Economic Club of New York.
But Rosengren, one of 10 people who vote on the Fed’s rate-setting panel this year, said rates are a bit easy and can, along with a tight job market, revive inflation that might have declined only temporarily.
He said a trade conflict between the U.S. and China - which could cut growth or raise prices - is all the more reason to keep rates on hold.
“I see no clarion call to alter current policy in the near term,” he said. “The Fed can afford to wait to see if that forecast does indeed materialize.”
Low unemployment creates the risk, in theory, that employers will raise prices and wages unsustainably to attract workers, while central bankers worry that too-low inflation will cause people to delay spending and sap the potency of Fed policies by increasing the chances rates will return to zero from their current 2.25-2.50% target.
The U.S. and China increased import tariffs on each other’s goods over the past several weeks after U.S. President Donald Trump said China had reneged on earlier commitments made during months of negotiations.
Even before the trade war flared, markets increasingly bet policymakers would cut rates to bring inflation up to its 2%-a-year target. But policymakers want to maintain the option of raising rates if wages or other prices rise or if markets get frothy.
Rosengren said the imposition of more tariffs could speed efforts to get inflation up to target but also “become much more apparent to consumers” who may cut spending. That is a risk to the momentum of an expansion approaching a ten-year anniversary in July that will be the longest on record.
“For now, I am optimistically assuming that both sides in the trade negotiations will work to reach an agreement,” Rosengren said. “I am also assuming that while the uncertainty is not helpful, it will be transitory, and thus have only a modest effect on the forecast for the U.S. economy overall.”
Reporting by Trevor Hunnicutt; Editing by Chizu Nomiyama