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Boston Fed President Eric Rosengren speaks with Yahoo Finance [Transcript]

Brian Cheung
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Eric Rosengren, president of the Federal Reserve Bank of Boston, spoke with Yahoo Finance in Hartford, Connecticut on Jan. 13 to share his first economic outlook for 2020 and what lies ahead for Fed policy.

Below is a transcript of his appearance:

BRIAN CHEUNG: Hi, good morning. We're here in Hartford, Connecticut, where President Rosengren, again, the head of the Federal Reserve Bank of Boston just made your first remarks for 2020, providing an outlook for the US economy. So in short, what do you expect for the US economy in 2020? And what should that mean for rate policy going forward?

ERIC ROSENGREN: Well, it's a relatively positive outlook. We have the economy that has grown pretty well over the last year, despite the problems with trade and the global slowdown. Expecting that we're going to see growth right around 2% over the course of the next year-- that's a little bit stronger than the productivity of the overall economy, the growth of the overall economy.

So that would entail a tighter labor market, a little bit lower unemployment rate, and a little bit pickup of inflation. So we'd see inflation closer to 2%. Overall, the outlook is good. And it's basically a soft landing, which means that we don't need to do very much at all on interest rates as long as we have that kind of outcome.

BRIAN CHEUNG: And that's what we saw from the SEPs, which were the forecast projections from Fed policymakers in the December meeting over what we might see in 2020, which was basically holding steady at the current range of 1.5% to 1.75%. What would you need to see to then change that baseline if you think we've hit that soft landing already?

ERIC ROSENGREN: So the question is whether they're risks to the forecast. So that's our most likely outcome or our modal forecast. And I think it's a pretty good modal forecast. But there are things that could go wrong on both sides. On the weaker side, if we were to see a pickup in trade concerns or more of a global slowdown-- we've seen some geopolitical concerns of late.

And those could potentially slow down the global economy in a way we're not anticipating. On the more positive side, the risk there, I think, is from financial stability concerns. We start seeing exuberance in financial markets. We start seeing real estate prices getting ahead of themselves.

And as a result, we end up having to have a correction down the road. So I think we have to be aware of the risks on both sides. Last year, we were primarily focused on risks on the downside. We should also be focused on some of the risks on the upside.

BRIAN CHEUNG: So on the risks to the downside, you mentioned two components-- US-China trade but then just broader geopolitical concerns. It seems like on one front in the US-China trade, we have the phase one deal signing supposedly this week.

But then, on the geopolitical risk, there's been the flare up in the Middle East between the US and Iran. Are those things kind of net positive, net negative right now? And would you need to see development on either of those fronts to also maybe then change your outlook for where rates should be?

ERIC ROSENGREN: Yeah, I would say in the middle of last year, we had much greater trade concerns than we do right now. The fact that we have-- or are likely to have-- a phase one agreement is certainly good news.

I think it's far from a complete trade agreement with China or, for that matter, with Europe, either. So I don't think we're out of the woods in terms of some of the trade concerns. I do think they've moderated relative to where we were maybe six months ago. So that's net positive.

BRIAN CHEUNG: But the US-Iran front, it seems like the financial markets have been kind of a little shaky on that. Is that something that you're just kind of watching right now, or is that something that you would expect to maybe get folded into some of the Fed debates as we head into the first meetings of this year?

ERIC ROSENGREN: The geopolitical concerns are always things that could happen. But to be honest, we've seen oil prices move a bit but not enough to really impact the economy in a significant way. And the United States is not nearly as reliant on the Middle East as it used to be, in terms of oil.

So I would say on that, I think it's unlikely the issues with Iran end up deterring the economy from continuing to do pretty well. But it remains to be seen. If we had a broader problem than what we've seen to date, then that would be something that we'd have to worry about.

BRIAN CHEUNG: So let's talk a little bit about the focus of your speech here today in Hartford, which was about the labor market and maybe inflationary pressures possibly running away if that were the case. For right now, you say that you think that, you know, inflation is pretty OK where it is.

In fact, you said it was basically almost ideal situation. We had a jobs report last week-- 145,000 jobs added. Unemployment stayed at 3.5. Wages only up 2.9% year over year. What was your reading on that recent jobs report for the month of December?

ERIC ROSENGREN: So I was a little-- in terms of the payroll employment or the unemployment rate, I thought it was a pretty good report. In terms of average hourly earnings, it was weaker than I expected. Average hourly earnings have been trending up, so wages have been trending up over the last couple of years.

So it's a little bit of an anomaly. I don't take too much information from just one report. I would expect that with tight labor markets, there's really no reason for wages to backtrack. And I would expect over time that we'll see upward progression in wages.

BRIAN CHEUNG: Now, you said it hasn't backtracked. But we did see that wages year over year were, I mean, getting up as high as I think 3.4% in February of last year-- again, 2.9% for December. So you think that the wage curve will continue to maybe bid prices for labor up through 2020? And you mentioned that the neutral rate you may expect to be around 3%. What's kind of your forecast for what that might look like in 2020?

ERIC ROSENGREN: So the unemployment rate's quite low by our normal standards. We're at a 50-year low. We particularly see it in New England, where most of the New England states, particularly north of Connecticut, have unemployment rates that are below 3%.

So when I talk to businesses, one of their biggest concerns is how they're going to attract enough labor. And the way to attract more labor in a very tight labor market is, you offer higher wages. So I think one of the concerns would be that if labor is too tight, we start to see wages going up more rapidly than people are anticipating and more rapidly than productivity increases.

So wages going up because productivity is going up-- that's not a problem for the economy. Wages going up when productivity is quite slow-- that is potentially more of a problem. Businesses either have to have lower profits or they have to raise prices more quickly.

BRIAN CHEUNG: Right. So when we talk about the labor market, it seems like there's a semantic question about whether or not you should call it a tight labor market, a hot labor market, or maximum employment. If you've described the economy right now as almost ideal, where do you see the labor market? Do you see it as basically at maximum employment?

ERIC ROSENGREN: So maximum employment-- I would say that we have very tight labor markets, very strong labor markets, right now. We have seen wages going up. They're not going up more rapidly than inflation and productivity. So I don't think it's a problem for the economy at this stage. But if wages were to continue to drift up, at some point, that would start translating, potentially, into more inflationary pressures. So I view that as a risk rather than a likely outcome. But I do think that we have to be attentive to risks.

BRIAN CHEUNG: And lastly, you opposed the three rate cuts last year. You're still a participant at the FOMC, although you rotated out of being a voter as we flipped the calendar into 2020. As we look back, you've flagged financial stability risks as a result of maybe easier monetary policy. I know that monetary policy operates on a lag, but have you seen any of the effects that you've been warning about in commercial real estate, for example, in office leasing business models like WeWork in the economy so far?

ERIC ROSENGREN: So I do watch real estate markets quite closely. They're interest-sensitive. And they tend to be an asset class that gets the economy into trouble if they end up reversing quickly. And so, I am focused on whether residential real estate prices are starting to increase more rapidly and whether commercial real estate prices are increasing more rapidly.

They have been going up a little bit faster than you might have expected. And I think that is an area that we should continue to watch to make sure that the accommodative monetary policy that we have right now doesn't start causing imbalances in the economy that become a problem.

BRIAN CHEUNG: Obviously, the balance sheet is something that's kind of difficult to explain to some people. But regardless, we've had a growth of $60 billion per month on the balance sheet itself, short-term Treasury T-bills.

But we've had over $200 billion offered through the temporary operations at the New York Fed. In the aggregate, with the three rate cuts that we got last year, what has been the effect of growing balance sheet policy at the Fed?

ERIC ROSENGREN: So I view the interest rate policy a little bit differently than the balance sheet policy. So the interest rate policy was clearly that we wanted to ease, in part because we were worried about the trade concerns, and part we were worried about global weakness. And so that was intended to offset that concern.

I would say, in terms of our balance sheet, that wasn't really meant to be anything more than a technical adjustment. So we don't know exactly where the demand and supply of reserves actually is.

And one of the reasons we don't know that is a lot of the bank regulations have changed pretty dramatically. And so we were shrinking our balance sheet coming out of the financial crisis. And we didn't quite know where we should be leveling off and then growing our balance sheet.

And in retrospect, it looks like we shrunk the balance sheet a little bit too much. Reserves got a little too tight. And so we've eased up on that. So I view that less as a monetary policy action to stimulate the economy and more as a technical adjustment to make sure that we were able to hit our Fed funds target.

BRIAN CHEUNG: Mhm. And that's been pretty clear from Chairman Powell's press conference, to say this is a technical adjustment to keep the Fed funds rate in range. But if the calibration was kind of trying to figure out where the proper level of reserves is, then it's also a question of figuring out what the estimate should be when the Fed at some point were to stop the expansion.

So what we know is that I think the purchase of $60 billion is going to happen per month through at least the first half of this year. But do you have an estimate? Have other policymakers started trying to figure out when to maybe stop the further expansion of the balance sheet at this point?

ERIC ROSENGREN: So I don't think it's a question of stopping so much as slowing down. So our balance sheet kind of grows naturally. One of the reasons it grows naturally is that there's more currency in the world, US currency.

And so you'd expect our balance sheet to grow with the amount of currency that people demand. So that's going to continue. So it's not like we stop growing the balance sheet. It's just that we grow it less rapidly.

And so I think in the next three or four months we'll get a better sense of what the supply and demand for reserves are. And at that point we can make a decision about when we want to grow the balance sheet just consistent with the liabilities.

BRIAN CHEUNG: So shifting back to the conversation on the labor market, the labor force participation rate stayed the same between December and the previous report-- 63.2%. Some have pointed to that as an example of there being slack in the labor market.

But your presentation might suggest that if we were to be closer, relatively close, to maximum employment that, you know, maybe we have pulled in all that we can pull in so far. What's your view on that? And do you think that, given where the labor force is right now, that the Federal Reserve should not be further accommodative through 2020?

ERIC ROSENGREN: I think we're appropriately accommodative now. And I do have concerns about making sure that we adjust the risks given how accommodative monetary policy is.

I don't think there's much slack in the labor market, to be honest. I think that we have tight labor markets now. That's why we've seen wages gradually going up. That's an indication that labor markets are tight.

Whenever I talk to businesses, their first complaint actually is that they have trouble finding labor at the prevailing wage and that they've been increasing wages. So I think there's plenty of evidence that labor markets are tight.

You are seeing people switch jobs a little bit more frequently. And I would expect that if we continue to be at this level of the unemployment rate, that we would over time see wages continuing to go up in a way that might go up faster than productivity, which would be more inflationary.

BRIAN CHEUNG: And this gets at the idea of NAIRU, right, the non-accelerating inflation rate of unemployment, also kind of folded into the idea of the Phillips curve, the relationship between unemployment and inflation. Estimates, though, of NAIRU have been coming down. And even we've seen that even just in the SEPs that we had in 2019.

Your own estimates, have they come down? And do you think that there are structural reasons to maybe believe that the way that policymakers thought about interest rate policy relative to inflation and the labor market has changed over, let's say, the last 10 years or so?

ERIC ROSENGREN: So it may very well have changed. And in fact, having this accommodative a monetary policy when the unemployment rate's at a 50-year low is already kind of testing, I think, the bounds for what we think can be a sustainable level of employment growth in this economy.

I just don't think we should push it too hard, that the benefits of pushing much harder when we already have 3 and 1/2% unemployment rate probably don't offset some of the risks. So different members of the committee may balance those risks differently.

I do worry about the sustainability of the economy. And I don't want to push so hard on the economy that we end up actually getting an unsustainable growth rate that we then have to raise rates more quickly than we would like to.

BRIAN CHEUNG: Right. And that kind of folds, I guess, into your forecast for GDP. 1.7%, I believe, is what it was for--

ERIC ROSENGREN: My potential GDP is--


ERIC ROSENGREN: --1 and 3/4%.


ERIC ROSENGREN: But I'm expecting over the course of this year that we'll grow a little bit above 2%.

BRIAN CHEUNG: Right. Now, do you think that that's sustainable given where the economy is right now and also given-- just think of the lack of productivity, structurally, that we have in the US?

ERIC ROSENGREN: So if my estimate were right, 1 and 3/4 would be the growth rate that we should expect to see. If we grow at a little bit above 2% and productivity is such that potential is 1 and 3/4, that would imply the unemployment rate drifting down a little bit more and further tightening of the labor market. So I think we could still be surprised that labor markets tighten more than we're anticipating, forcing wages and prices to go up more quickly than we're anticipating right now.

BRIAN CHEUNG: So it seems like it's kind of in the rearview mirror with the yield curve having re-steepened. But there were concerns in the summer last year of the yield curve flashing a sign of recession with the twos and the tens moving.

I'm wondering what your baseline is for whether or not we will see a recession at some point, because they tend to, you know, come after a yield curve inversion by about 18 months. Do you expect that in 2020, at the beginning of 2021? Or have things been staved off by Fed policy last year?

ERIC ROSENGREN: Well, I think there are other reasons for why the yield curve got negative, in part because we're seeing long rates around the world being pushed down. So while our monetary policy has got more normal, if you look at Europe and Japan, they're still pushing long-term rates. And they're quite low by global standards. So that's putting downward pressure on our own 10-year Treasury rate.


ERIC ROSENGREN: So I think one of the reasons why we got a negatively sloped yield curve was really the stimulus occurring around the world rather than so much a concern about-- that relationship that you're focused on really is reflecting the fact that normally, at this stage of the cycle, inflation's picking up, the Fed raises rates. And as a result, we get a negatively sloped yield curve.

We still have an accommodative monetary policy. I don't think it's a situation where that yield curve relationship is going to be as much of a signal as it has been in the past.

BRIAN CHEUNG: So accommodative monetary policy, again, you dissented against those three rate cuts. But as we saw from the projections in the SEP in December, all the participants saw that they're OK with the rate being between 1.5 and 1.75.

So for those that are reading the dot plots but also reading your dissents, how do you square those two things, where you've dissented against those three rate cuts, but you are comfortable with the fact that we're between 1.5 and 1.75 headed into 2020?

ERIC ROSENGREN: So the dot plot-- the median is no change. But that isn't all the participants. So I think the way I would square it is that I'm worried about the potential risks of pushing the economy too hard.


ERIC ROSENGREN: And so my modal forecast is pretty good. But I think that we're taking some risk by having this accommodative a monetary policy at a time when the economic outcomes have actually been pretty good.

So they were good last year. And I'm expecting them to be pretty good this year. And as a result, I'm not sure we need policy this accommodative.

BRIAN CHEUNG: And I guess the point I'm trying to get at, you know, there's a distinction, I guess, between dissenting against a rate cut and then, in the following meeting, advocating for a rate hike to make up for that, right? So I guess, in your view, the policy discussions over the period between July and October basically made you OK with, then, that further accommodation?

ERIC ROSENGREN: So it's not-- I would still not actually have eased nearly as much as we have, in part because I'm worried about the risks to the economy. So the modal forecast and my expected outcome is still pretty good.

But I think we're taking some risks, particularly on the financial stability side. And so I do worry that if we allow financial markets to be too exuberant, we end up down the road having to tighten more and actually slowing down the economy.

So the benefits of a slightly tighter labor market right now don't offset the risks that we might see down the road. So I still would prefer a less accommodative monetary policy.

The committee as a group has made their decision. So I'll wait until I see a bigger build up in financial markets before I make a strong argument for why we should reverse.

BRIAN CHEUNG: OK. And then the longer term picture-- we have negative interest rate policies, yield curve control. These are things that are being talked about right now.

If we do get backed up to zero rates again, you mentioned here in Hartford that you would-- you would advocate for QE again and forward guidance. But could you see the Fed taking up those tools-- negative interest rates and maybe yield curve control?

ERIC ROSENGREN: I think we have to be open-minded about the tool set that we have, depending on the circumstances. I think it's very unlikely that I'll be supportive of negative interest rates if we were to have a recession.

There'd be a lot of other tools that I'd use before that. But some of the other tools, I think, are things that we should appropriately consider whenever that next recession occurs.

BRIAN CHEUNG: And then Fed Listens-- that will wrap up, I believe, in the middle of this year. We'll find out what tweaks there might be to the monetary policy framework in view as in how we address inflation.

So 2% is the target. Right now it's symmetric. But whether or not there should be a switch to average inflation targeting, nominal GDP targeting, where do you land on that debate? And do you expect the Fed to make a change once the Fed Listens process is wrapped up?

ERIC ROSENGREN: We'll have to wait and see when the process is over to determine exactly what we're going to do. I've been supportive of the idea that we should move towards an inflation range and that we should be comfortable with inflation being a bit above our target during times like we're at right now-- we're at pretty good economy-- knowing that when the economy does much worse, we're probably going to have a tough time hitting our 2% inflation target.

BRIAN CHEUNG: And this gets at the point, too, I guess, you know, if inflation were to come up as a result of a tight labor market, that you'd be OK-- you said this in your speech-- you'd be OK with it overshooting 2% by a little bit. But is there a guidepost for when you would say, hey, this is now rapid inflation, and we would have to tighten policy?

ERIC ROSENGREN: There is. But the committee will have to decide for itself whether, one, they want even a target, and what the balance of that target would be.

BRIAN CHEUNG: Mhm. So, because I know that some policy makers have said maybe it's 2.5%, in terms of tolerating that type of level-- level of inflation before tightening again, is it-- is it a good or a bad idea to, maybe, put a number on that, or--

ERIC ROSENGREN: I think we need to get to 2% before we worry about getting to 2 and 1/2%. But a range of 1 and 1/2 to 2 and 1/2% I would personally be comfortable with.

BRIAN CHEUNG: And then, was there anything in the New England district, your district, District 1, that you've seen in, say, let's-- you know, the last two or three months that have kind of changed or been a huge driver for the economic forecast that you just delivered here today that might be unique from other districts?

ERIC ROSENGREN: I don't think we're that different other than the labor market's a little tighter, particularly in northern New England. So if you look at Massachusetts, New Hampshire, Vermont, and Maine, we all have-- all four of those states have unemployment rates below 3%-- so a little bit tighter labor market. We are seeing wages go up a little more rapidly in the Boston area, for example.

BRIAN CHEUNG: All right. Well, that's Boston Fed President Eric Rosengren sitting down here with us in Hartford, Connecticut after delivering your first outlook for 2020. Thank you so much for joining us today.

ERIC ROSENGREN: Thank you for having me.

BRIAN CHEUNG: All right.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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