With U.S. economic growth continuing at a solid rate despite the U.S.-China trade war, Boston Federal Reserve President Eric Rosengren has argued that it is not necessary and potentially risky for the central bank to lower interest rates.
Rosengren, who has voted against the last two interest rate cuts by the Fed, explained his decision in a speech at the Stern School of Business at New York University on Friday.
“Current economic conditions are quite favorable, and stable, and private forecasters expect those conditions to remain quite similar through the end of the year,” Rosengren said.
He added, “The data we have in hand suggest instead that the recovery would continue apace even with little monetary policy accommodation.”
Rosengren noted that real GDP grew by 2 percent in the second quarter despite trade-related impediments and that forecasts indicate growth will continue at close to 2 percent.
The Boston Fed President argued monetary policy is already accommodative and warned further accommodation in response to risks to the economic outlook entails costs and introduces risks of its own.
“The current situation involves pushing rates lower when asset prices, and in particular some risky asset prices, already seem inflated,” Rosengren said. “I don’t see current financial risks as causing a downturn, but such conditions have the potential to amplify a downturn should it occur.”
He continued, “Additional accommodation is not needed for an economy where labor markets are already tight – and risks further inflating the prices of riskier assets, and encouraging households and firms to take on what may be too much leverage.”
Reflecting a divide at the Fed, Rosengren’s speech comes the same day St. Louis Fed President James Bullard released a statement explaining his preference for cutting interest rates by 50 basis points at the Fed meeting earlier this week.
The Fed lowered interest by 25 basis points as expected on Wednesday but indicated officials are mixed about whether the central bank should cut rates again before the end of the year.
Bullard attributed his preference for a steeper rate cut to signs that U.S. economic growth is expected to slow in the near horizon.
“Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession, and many estimates of recession probabilities have risen from low to moderate levels,” Bullard said.
He added, “Moreover, the yield curve is inverted, and our policy rate remains above government bond yields for nearly every country in the G-7.”
Bullard also pointed to tame inflation, noting readings on consumer price growth continue to run well below the Fed’s 2 percent target and that inflation is expected to remain muted.
“In light of these developments, I believe that lowering the target range for the federal funds rate by 50 basis points at this time would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks,” Bullard said.
He continued, “It is prudent risk management, in my view, to cut the policy rate aggressively now and then later increase it should the downside risks not materialize.”
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