The Federal Open Market Committee should raise interest rates at every other meeting by default in 2017 unless economic data come in that are inconsistent with forecasts, Federal Reserve Bank of Boston President and CEO Eric Rosengren said today. Rosengren does not currently have an FOMC vote; the Boston Fed will rotate back into a voting seat in 2019.
“At present, the perception seems to be that the outcome of each FOMC meeting depends on nuances of incoming data, with the base case being no change in rates,” he said, offering instead “an expectation to tighten at every other meeting unless incoming data are materially inconsistent with the forecast. Importantly, this would still be a fully data-dependent approach, not a preset path, as it would hinge on the incoming data — but the base case would be four tightenings, reflecting the strength of the economy that I believe justifies more regular normalization of interest rates.”
Rosengren noted that the economy will likely have reached the Fed’s dual mandate of full employment and 2 percent inflation by year’s end, but that a federal funds rate of less than 1 percent implies a negative interest rate. “While it is not unusual to have negative real interest rates when the economy is quite weak, as I will show today, it is unusual to still have negative real interest rates late in a recovery when the economy is close to full employment and nearing the inflation target,” he said.
