January 13, 2020 / 3:12 PM / 12 days ago

Fed's Rosengren warns of inflation risks to central bank's 'almost ideal' economic outlook

HARTFORD, Conn (Reuters) - U.S. Federal Reserve policymakers are forecasting an “almost ideal” outcome in 2020 where the U.S. labor market will stay strong and inflation will approach the central bank’s 2% target, but officials should remember to consider potential risks, Boston Federal Reserve Bank President Eric Rosengren said on Monday.

FILE PHOTO: The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks during the "Hyman P. Minsky Conference on the State of the U.S. and World Economies", in New York, April 17, 2013. REUTERS/Keith Bedford/File Photo

Among those risks is the threat that the tight labor market could lead to a sudden pickup in inflation, Rosengren said in remarks delivered to the Connecticut Business & Industry Association in Hartford, Connecticut.

“Central bankers do not have much historical experience with extended periods where interest rates are running below the estimated equilibrium level while unemployment rates are, simultaneously, historically low,” Rosengren said. “So we want to be alert to any potential risks emerging.”

Rosengren, who voted against the three rate cuts passed by the Fed last year, said interest rates are now accommodative and cautioned that officials need to watch out for the risk that prices and the labor market could grow faster than expected. He does not have a vote in monetary policy decisions this year because of the Fed’s rotation.

He also on Monday repeated his concern that low rates could encourage consumers and businesses to take on more risk and inflate the value of real estate and other assets. Both commercial and residential real-estate values are “sensitive” to rates and valuations could grow when rates are low, Rosengren said.

Fed officials voted unanimously to keep interest rates unchanged at the December policy meeting and policymakers sent a strong signal that rates are likely to stay at current levels for the time being.

EVEN MORE UNCERTAINTY

Policymakers expect the unemployment rate to stay below 4% in the range seen last year, Rosengren said. But with interest rates also low, there is a chance that the labor market could reach “unsustainable levels,” causing wages and inflation to grow more quickly than expected, he said.

He also noted that, so far, inflation is more muted than expected given today’s low levels of unemployment - a puzzling outcome some economists attribute to the weakening of unions and shifts in the types of jobs available.

Still, there have been recent increases in wages, which means businesses may need to start raising prices, which could lead to greater inflation. “We are seeing some resistance to raising prices at this point, but at some point we would expect wage increases to start flowing through to prices because you can’t keep having the profit margins reduced.”

Despite the optimistic outlook for the job market, Rosengren said trade negotiations and the presidential election could create more uncertainty and put a damper on business investment.

The policymaker said the “phase one” deal being discussed with China is not a “complete trade deal” and that businesses need more clarity about tariffs.

“Overall, I don’t think the trade agreement by itself has really eliminated the problem with trade concerns,” Rosengren said in response to questions from the audience.

The election is also creating uncertainty because of the chance that voters may face “two very different choices” in November, Rosengren said. Some businesses may delay major investments and consumers may put off major purchases until after they know what to expect for tax policy, he said.

Rosengren said he generally expects consumer spending to remain strong amid a robust labor market, a rising stock market and strong personal income.

Reporting by Jonnelle Marte; Editing by Andrea Ricci

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