Boston Fed CEO remains hopeful on U.S. economy

Rosengren, in Concord, sees continued growth, but raises concerns
‘By historical standards|!!| 5 percent is getting pretty close to what people think of as full employment|!!|’ Boston Fed CEO Eric Rosengren told a Greater Concord Chamber of Commerce audience.

The national and state economy are growing, but the trepidation expressed by Wall Street and some monetary policymakers is not unsubstantiated.

That’s according to Eric Rosengren, CEO the Federal Reserve Bank of Boston, who presented an economic update May 11 at a Greater Concord Chamber of Commerce forum.

As part of his PowerPoint presentation, Rosengren referenced historical data collected by the Bureau of Labor Statistics that illustrates, despite slumps, that the country is gradually adding jobs, wages are growing, and thus another interest rate hike is in the near future.

But inflation remains far below the 2 percent Fed target – it was 1.4 percent in February but dropped to 0.9 percent in April – and weakness in consumer spending is slowing GDP growth, which increased by only 0.5 percent in the first quarter, compared to 1.4 percent at the end of 2015.

The most recent slowdown, at the beginning of 2016, was not anticipated, said Rosengren, but the sharp drop in oil prices and concern over foreign markets in China and Europe have had a negative effect, and will continue to put some fear in the stock market.

“It’s not that we shouldn’t be concerned about that, but we should avoid taking policy actions [to avert global events],” said Rosengren, who explained it’s better to see the empirical impact of such events on the U.S. economy through data, versus responding to a knee jerk reaction.

It’s still too early to fully analyze the second quarter of the year, since employment and auto sales are the only data currently available, said Rosengren.

The U.S. added 160,000 jobs in April, shy of the 203,000 the Fed expected and nearly 40,000 lower than the average seen in the first three months of the year.

But, Rosengren explained, adding anywhere from 80,000 to 100,000 jobs per month is enough to get the labor market to tighten.

‘Robust enough’

And the labor market is tightening. Nationally, the unemployment rate sits at 5 percent, while New Hampshire has the second lowest unemployment rate in the country, at 2.6 percent in March. (South Dakota has the lowest, 2.5 percent.)

“By historical standards, 5 percent is getting pretty close to what people think of as full employment. My own view would be about 4.7 percent,” said Rosengren.

He added that “wages are starting to pick up, that’s been one of the puzzles since the great recession was why we weren’t seeing any wage growth,” he said.

Despite that, the inflation rate remains low.

“One way that that gets corrected is, as we tighten the labor market, we see wages going up a little bit more quickly,” said Rosengren. “When you combine higher wages with people working longer hours, you get a situation where they now have more income for consumption. So, one reason I’m reasonably optimistic is, while that (April jobs) report was not as strong as some people were hoping, I still think it’s robust enough that it’s indicative that we’re going to be seeing a reasonably good second quarter.”

Already, indicators like job and wage growth should spark more spending – the Fed anticipated 3 percent growth in consumption in the first quarter, but it was just 1.9 percent. Rosengren said the Fed “didn’t have a great explanation” for a drop in car sales in March, but thought it was an aberration, and would return to sales seen in January and February.

And then there’s the question of raising interest rates. In December, the Fed raised short-term interest rates 0.25 percent, with no notable market reaction, said Rosengren, who attributed the market’s negative reaction during that time to China’s stock market crash and Europe’s market slump.

“In my own view, the market actually has a fairly dire view of whether we’re going to be raising rates over the course of this year. They have a very low probability both for June and July,” when the Fed meets to discuss monetary policy, said Rosengren. “And many on Wall Street and your local financial futures are expecting at most one increase over the course of this year. That would be consistent with an economy that is actually pretty weak. My own view is the underlying strength of the economy is stronger than that, that the fundamentals in the U.S. economy are strong enough that we’re likely going to be removing accommodation a little bit more quickly than is currently anticipated.”

Real estate concerns

But those moves depend on GDP growth. If that growth continues at a sluggish 0.5 percent, unemployment could rise again, said Rosengren. He’s aiming for 1.75 percent growth, to further tighten the labor market.

One area New England should be concerned about is drastically rising commercial real estate prices, reminiscent of the cause of the region’s banking crisis in the late 1980s and early 1990s, said Rosengren.

“It’s not a situation that would completely ring an alarm bell, but it is something that I think is notable enough, that one of the consequence of very low interest rates is it does encourage an interest-sensitive sector to have price appreciation go up more quickly than it otherwise would,” he said.

“We already are starting to highlight the potential concern we might want to focus on,” said Rosengren, who mentioned that a supervisory letter was sent to banks in 2015, to ensure they aren’t overextended if there is a reversal in real estate prices.

When asked how the national debt factors into the strength of the U.S. economy, Rosengren said monetary policy has no role in that, and it is entirely up to Congress and fiscal policy.

“It’s clearly an issue that has actually impacted policy over the last 10 years,” Rosengren said. “So, arguably, when we had the great recession, and the unemployment rate got high in the United States and around the world, a better mix of policy would have been more fiscal policy and less monetary policy. That wasn’t the direction that we actually took, and so monetary policy became extremely accommodative.”

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