Senior economics reporter
Boston Fed President Eric Rosengren sat down with MarketWatch on the sidelines of his regional bank’s monetary policy conference
Boston Fed President Eric Rosengren said he does not read much about a possible recession from the shape of the yield curve.
“I don’t take as much information from the yield curve as some other people. It is one of many things I look at, but I don’t give it any special attribute in terms of telling us cyclical changes,” Rosengren said in an interview with MarketWatch.
The discussion comes as the flattening of the so-called yield curve has raised fears about the health of the economy, since an inverted curve is often a leading indicator of a downturn.
Rosengren said he wouldn’t focus on the spread between the 10-year Treasury note TMUBMUSD10Y, -0.10% and the two-year note, with quantitative easing occurring in Europe and Japan and while the Fed has its own big balance sheet.
“I think there are a lot of reasons to believe that that relationship is not constant over people’s balance-sheet changing so much,” he said.
“If we’re growing very rapidly and inflation is picking up very rapidly, and the yield curve is negative, I will still say we should be raising rates,” he said
Rosengren, who will vote on interest-rate policy next year, is a firm believer in more gradual rate hikes over the next year.
He said the gradual pace the Fed has been following – one quarter point move every three months – is appropriate.
“If I’m doing it every other meeting, that’s not happening all that quickly,” he said.
The Fed can ascertain whether there is “some bite” from policy.
“As long as we are able to go gradually, I think it is less likely that we’ll make the kind of mistake [like overtightening],” he said.
Rosengren said he doesn’t favor the suggestion from some of his colleagues, like Dallas Fed President Robert Kaplan, that the Fed hike until rates are at “neutral” level and then pause.
“I don’t think that there is any special nuanced point where we should necessarily stop,” he said.
A neutral level is the level of rates that neither boosts nor restricts growth. Rosengren’s estimate of the neutral rate is a range between 2.75% and 3%.
Rates are now between 1.75% and 2%.
The Boston Fed president said the economy is “pretty good,” with inflation “right where we want it to be” and strong growth.
“There is no reason to be close” to a neutral level of rates, he said.
“We have the flexibility to go a little bit more slowly because we’re not above our inflation target, but there is no reason not to continue to increase gradually,” he said.
Rosengren said it is reasonable to think that policy will move into restrictive territory.
“It is very reasonable that, given we have slightly accommodative monetary policy and very accommodative fiscal policy, an appropriate policy will be to be a bit above what we think the [neutral] rate is,” he said.
“The goal isn’t to cause the economy to slow down so much that we have a recession,” he said.
Rosengren suggested he didn’t support rewriting the Fed’s policy statement for its next meeting on Sept. 25-26.
“I think people have a pretty good idea of where we’re going right now. I think the statement will evolve when we get closer” to neutral, he said.