Federal Reserve official sees growth, interest rate hike in 2015

MADISON — After solid growth in 2014, the U.S. economy is on a path toward continued expansion in 2015, Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston, said Thursday at the Wisconsin Bankers Association’s annual Economic Forecast luncheon.

And that means the Fed will most likely begin raising the short-term interest rates starting late this spring as the central bank pursues a policy of “normalization,” he said.

Rosengren, who earned his doctorate in economics from UW-Madison in 1986, warned that there are no guarantees for the coming year, however. But he predicted the shift to normalization will be a smooth rather than “bumpy ride.”

He joked that he enjoyed using the word “normal” again when discussing the economy because that word has been absent for the past five or six years from his monetary policy talks.

“This is a sign that the economy is doing much better, so we are not talking about ‘if’ normalization will occur, but when and how,” he said.

He said he many were surprised that 2014 was so stable for the economy and the markets, considering all the “events” that occurred. Those included a new Fed chairwoman in Janet Yellen, a new vice chairman in Stanley Fischer, the end of the Fed bond purchase program and the move toward a “patient policy” for raising rates that is dependent on meeting the twin objectives of controlling inflation and reducing unemployment.

He said the unemployment rate last year fell much more than expected, with more people working rather than pulling out of the workforce. That reduced the national jobless rate to 5.8 percent, down from near 10 percent at the height of the recent recession. He also noted that inflation remains below the target rate of 2 percent – something he called “quite unusual.”

“Finally, the U.S. stock market has done quite well during this period and long-term bonds have fallen below 2 percent, much lower than I would have expected,” he added.

Rosengren said some have argued that the Fed should have already raised interest rates and that the central bank has been too patient.

He said the last time the Fed raised rates was in 2004, when the unemployment rate was 5.6 percent and inflation was 2.8 percent, twice the current 1.4 core rate of inflation.

“So we are not only well below our target inflation rate, but well below the figure at which we started tightening rates last time,” he said. “By that standard of our recent historical experience, we have been unusually patient to date. But if you think about macro models, whether it is April or September, it usually doesn’t make that much difference when the tightening occurs.”

He said the Fed has been cautious about raising rates because it does not want to derail the economic recovery that is underway. He said the unemployment report coming out this Friday will indicate if there is continued improvement in the labor market.

He said the economy has been gaining around 200,000 jobs a month, something he called a “really positive sign.” But the downside, he noted, has been weakness in wage increases that have not been much above inflation, averaging around 2 percent.

“That’s much weaker than what you would expect,” he said, calling it a surprise. “You would expect compensation to be increasing 3 to 4 percent with the economy growing. We’re not there right now, which is one of the reasons we’ve been undershooting on the inflation target as well.

“There are some jobs that are in great demand, but it’s not very broad right now,” he noted. And that is an indication that the country still as a relatively weak labor market, which is different than when the country was coming out of earlier recessions.

“We are not seeing much labor market pressure at this point,” he said. “So we are looking forward to seeing that pick up.”

— By Brian E. Clark
For WisBusiness.com