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

Eric Rosengren, president of the Federal Reserve Bank of Boston, spoke with Yahoo Finance to discuss inflationary pressures and what lies ahead for Fed policy.

Below is a transcript of his appearance on June 25, 2021.


BRIAN CHEUNG: Joining us now here on Yahoo Finance is the president of the Federal Reserve Bank of Boston, Eric Rosengren. It's great to see you, President Rosengren. I want to kick off our conversation as Alexis was saying, a lot of eyes are on Federal Reserve policymakers. But I want you to respond specifically to this morning's inflation numbers from the Bureau of Economic Analysis showing that core inflation rose by 3.4% year-over-year. That is the highest reading that we've gotten since 1992. Just wondering how you're parsing through this morning's report.

ERIC ROSENGREN: Yeah, as you highlight the numbers that came in with 3.4% for the core and 3.9% for the total. So, if core inflation was going up, that's not a complete surprise. I do believe that this is likely to be transitory. And the reason I think that is for a number of reasons. If you looked at the trimmed mean PCE, it's at 1.8%. So it's substantially lower. What the trimmed mean does is it takes out the large movements at both ends of the distribution. But if you look at private sector forecasters, they're expecting — something like the survey of Professional Forecasters — they're expecting core inflation next year to be 2%. I'm expecting it'll be slightly higher than that. You're seeing a Treasury 10-year that's trading at 1.5% roughly, all that is consistent with inflation going up right now. As a result both of repricing, relative to where we were in the pandemic, and is also reflected with the fact that there are a lot of shortages. Real GDP is growing quite quickly, we're expecting roughly 7% growth over the course of this year. With that kind of growth — and it's a bit of a surprise that we've been able to open up as quickly as we have — I think it's not unexpected that we would see some supply shortages and indeed that's exactly what we're seeing.

If you look at something like used car prices that are up quite dramatically over the last few months, that's not something that's likely to persist. Eventually we will have chips that are going to be produced, and people will start buying new cars instead of used cars. And I would expect those prices to come down. Similarly, planes, hotels, rental car. All those prices are up, but they're up relative to very low levels during the pandemic. So I expect that there will be a surge in prices that we've been seeing this spring, it'll continue maybe a little longer than we were expecting, but I think the best guess going forward, is that when we get into next year we're going to be seeing inflation just barely above 2%. Very consistent with the private forecasters.

BRIAN CHEUNG: So president Rosengren, can we expand a bit on your economic forecasts, You said that your projection is for 7%. I don't know if you're speaking about the FOMC median projection from last week. But where do you, based off of what you're seeing in the Boston Fed, have GDP, inflation, employment over the now-to-2023 time period.

ERIC ROSENGREN: My own view is pretty close on inflation to what the median was for the Summary of Economic Projections of the June FOMC. So I'm expecting inflation to be a little bit above 2%, I am expecting that the unemployment rate — which is currently 5.8% — is going to decline quite significantly over the course of this year, likely to be in the mid-fours by the end of the year and arguably at full employment as we get into next year. So I think there's likelihood of very good progress on the labor markets. That being said, currently we have 5.8% unemployment, if you look at the labor force participation rate or the employment-to-population ratio, we're still well below where we were in February of 2020. So there's still a lot of labor market slack now. I do think that if we get the growth that we're expecting that will be less of the case as we get into next year.

BRIAN CHEUNG: Based off of those projections, do you expect — first of all, inflation to be only just a nudge above 2% because of some reaction from the Federal Reserve? There's been a lot of chatter about the seven of the 18 members that have a rate hike penciled in for 2022 and 13 of the 18 at least one rate hike through the end of 2023. Where are you in that timeline?

ERIC ROSENGREN: It really depends on what the economic outcome is when we start raising short term interest rates. So the criteria is that we have a sustainable inflation rate that's 2% or above, and that we're at full employment. I do expect that it's quite possible that we will see that by the end of next year. But it does depend on whether the economy progresses as strongly as I'm expecting. So we'll have to see if that's the actual outcome, but it wouldn't surprise me based on the current projections of what we're seeing in the data that that criteria could be met as soon as the end of next year.

BRIAN CHEUNG: So does that mean that you did have one rate hike penciled in for the end of next year?

ERIC ROSENGREN: Yeah I don't talk about my specific forecasts, but I will say that it's quite possible that the conditions that were laid out in the statement will be met, around the end of next year if we get the kind of growth that we're expecting.

BRIAN CHEUNG: Got it. Well, it was worth a shot anyway. But I want to expand a bit on the labor side of things you did touch on it. Where do you see full employment or when do you see us reaching full employment and then as a secondary question because this is arguably more important? Do you think that the definition of full employment in the post-pandemic economy is different than full employment as you saw in the pre-pandemic economy?

ERIC ROSENGREN: I think determining full employment right now is pretty difficult. Part of it is because the main driver of this recession was the pandemic, and concerns about personal health. So, we know that both employment-to-population and labor force participation are much lower than they were in February 2020. I think a big question is whether those people are going to be willing to come back into the labor market, particularly in job positions where they may have a lot of contact with people where they may not know whether they're vaccinated or not. So think of somebody who works in a hotel or somebody who works at a restaurant. There may be people that are concerned about their own personal safety. Or they may be concerned that they have young children. They don't want to put them in childcare right now. And as a result they’re pulling out of the labor force. So, it's going to take some time to figure out exactly why we have so much labor market slack and how much of it's related to public health concerns and childcare concerns, and how much is related to other concerns.

So I think one way we observe that is whether wages and prices start picking up substantially. Obviously prices are quite high for other reasons right now, but if we start seeing inflation numbers that are much higher next year and wages going much higher next year for the overall labor market, then that is something that we're going to have to pay attention to. Right now that's not my expectation, but I think we have, in our historical data post World War II, we don't have a serious pandemic in that data. So we don't know exactly how the opening up is going to occur. And I think we have to be pretty humble about what's going to happen with inflation and labor markets. This is going to be a time where we should be particularly data-driven.

BRIAN CHEUNG: Well, as you point out the recovery pace is at a speed we never seen before so it's kind of hard to catch a breath in terms of how everything is going. But I guess that raises the question of: is there a risk of a trade-off, if, for example, the recovery in price levels is happening at a faster pace than the recovery in employment levels. Does that, maybe, threaten the possibility of the Fed again tightening to quell inflation, before the labor market has had the ample opportunity to heal?

ERIC ROSENGREN: We've made clear that we're not going to raise short-term interest rates until we think we're at full employment. So, our framework is basically going to keep us from doing that. But I do think we have to be sensitive to what's happening with inflation and measuring full employment is not straightforward as I just mentioned. So, we look at both inflation and unemployment and a variety of other indicators when determining what's appropriate monetary policy and that's going to be what we do as we continue to see how the data gets revealed.

BRIAN CHEUNG: All right, well we'll have more of this conversation again with the Boston Fed President Eric Rosengren on the other side of this break. Keep it tuned in to Yahoo Finance.


BRIAN CHEUNG: Welcome back to Yahoo Finance I'm Brian Cheung, here in a conversation with Boston Fed President Eric Rosengren. And President Rosengren, we were talking about monetary policy. I want to kind of just switch gears real quick to another news item that people have been watching: the Biden agreement for an infrastructure package that could total $1.2 trillion. I guess from your vantage point what might be the impact of that, especially given the concerns about maybe an overheating economy?

ERIC ROSENGREN: First of all, we don't actually have a signed bill yet, so we'll see if the actual bill gets signed and what it's paired with. But fiscal policy is highly stimulative as you've highlighted. That is one of the reasons why we're expecting such strong growth. So it's a bit unusual to have a coordinated, very low period of interest rates at the same time that we're getting so much fiscal stimulus. That is one of the reasons we're expecting to get back towards full employment at the end of this year, beginning of next year. And so I'm very supportive of the fiscal policy we're doing. I do think at some point we're going to have to be thinking about how to finance that. Certainly when we get back to full employment and inflation is around 2%, just as monetary policy has to normalize so does fiscal policy.

BRIAN CHEUNG: Now I want to switch gears to financial stability you just had a pretty in depth conversation at the OMFIF about a number of stability risks that you're watching. But people forget that the Federal Reserve is not only watching your proximity to maximum employment and also price stability, but also making sure that there's no bubbles popping up in the financial system. You did call out home prices as one possible area. Wondering if you could elaborate a little bit more about the rising home prices that you're seeing in the Boston area where you sit, and whether or not that could present some sort of financial stability risk?

ERIC ROSENGREN: My concern about housing prices is not just because prices are going up in the Boston area. It's really because prices are going up across the country. And I think you're also seeing price increases that are going up rapidly in less traditional places. More rural areas of Maine, Western Massachusetts are places where real estate prices normally are not going up rapidly. So it's not just in the cities like Boston that we're seeing it. We're seeing it in the outlying areas as well. Now that's not to say that I think that it's an immediate problem, but in that talk I did have a chart that highlighted across a wide variety of markets, housing prices have been going up in many of those markets. It's already higher than it was in the 2005 to 2007 period.

And I would highlight that over the last three or four months at least in some markets, the steepness of how much prices have been going up is quite similar to what we were seeing in the 2005 to 2007 period. The reason I focus on housing prices and real estate prices generally is because it's a widely held asset, and is kind of the result of financial stability problems and many of our worst recessions. So think about the financial crisis of the Great Depression in the United States, but if you look at financial stability problems around the world, they tend to be tied to real estate. So I think it's an area that bears monitoring. It's not at the point where we should be panicked, it's not at a point where we should be overly concerned. But if this were to continue and if it was starting to get embedded in people's expectations for where prices would be going, that would start to become a more significant concern. The last thing we want to do is to try to get to full employment, and then unintentionally cause a boom and bust of the housing sector that prevents us from getting to full employment or staying at full employment. So I think that is one of the many areas of financial stability that we have to keep our eyes on as we think about keeping interest rates low in order to meet our inflation and unemployment objectives.

BRIAN CHEUNG: Well I guess a natural question might be: is the Fed’s purchases of agency mortgage backed securities — its buying about $40 billion a month as part of its quantitative easing program — feeding into what you're seeing? And if so, does that make a case for maybe skewing away from mortgage backed securities at some point when you do decide to start tapering that program?

ERIC ROSENGREN: So our criteria for tapering is “substantial further progress.” The question is when we reach that view that we've attained substantial further progress. I think in inflation, we've made substantial further progress, maybe we have overproduced right now. But on the labor market, I still think there is significant labor markets slack, but I do expect that it's going to subside over the course of this year. So I think it's quite likely that the substantial further progress criteria, at least in my own personal view, will likely be met prior to the beginning of next year. And, a lot depends on exactly what happens with the economy over the course of the summer and into the fall about when it would be appropriate to actually start the taper.

In terms of your direct question on MBS, we were buying both Treasuries and MBS in order to keep long-term interest rates low. I do think that one of the areas that we should consider is that the tapering maybe should be in the same amounts for both the Treasury securities and MBS. As you know, we're purchasing $120 billion overall, $80 billion of Treasuries, $40 billion of MBS. If we decrease the same amount of those two when we do start tapering, that would mean we'd stop the MBS program well before we stopped the Treasury program. These are details thought that the FOMC has not decided on. So these are just my own personal views. But I do think right now that the spread between MBS and Treasuries is quite narrow. And I do think we have to pay attention to the housing sector. So I think that that is one of many considerations that we should include as we think about the substantial further progress.

BRIAN CHEUNG: And then I want to shift lastly here to stablecoins You were talking about tether in your presentation, actually just about an hour ago. It's been taking a lot of air out of some of these prime money market funds but you pointed out that tether and a lot of these other stable coins are deep in things like commercial paper and even corporate bonds in some cases. But my question is that the Fed did step in during the midst of this pandemic to backstop the corporate debt market and commercial paper markets. So I guess isn't the financial stability risk of those stablecoins like tether only as big of a risk as the Fed will allow given its historical role as a back stopper?

ERIC ROSENGREN: The reason I talked about tether and stable coins is if you look at their portfolio, it basically looks like a portfolio of a prime money market fund but maybe riskier. We actually had a stablecoin that ran into financial difficulties last week. Tether, as you highlighted, has a number of assets that, during the pandemic, the spread got quite wide on those assets. The Fed intervened in order to make sure that short term credit markets continued to operate. And the reason we should be a bit concerned about stablecoin is that its growing very rapidly so there's exponential growth in stablecoin. The prime money market funds have been slowly going down as people have looked for a less risky way to hold their transactions accounts and many of them have moved to government money market funds. But I do think we need to think more broadly about what could disrupt short term credit markets over time, and certainly stablecoins are one element. I think there are other investment products as well that have the characteristic that, if we have a big shock in financial markets, people tend to move out of those areas quite quickly. And I think that's an area of financial stability we need to pay more attention to.

BRIAN CHEUNG: I guess as a follow up though, I guess my point being that: if the Fed is going to backstop those markets if they do experience stress, then wouldn’t there not be as big of a financial stability risk from those types of products?

ERIC ROSENGREN: So, my own view is that we should be changing the regulatory environment so that we don't have to intervene in the market every 10 years. And while we ran the MMLF, the AMLF to support short term credit markets and the money market funds in the last two recessions out of the Boston Fed, I would hope that we would change the regulations so that the next time we have a crisis, we don't have to do it again. And I guess the broader point is that it's not just money market funds that we have to be worried about. We have to be worried about things that destabilize short term credit markets. That takes a more holistic approach to thinking about financial market regulation. I do worry that the stablecoin market that is currently, pretty much unregulated as it grows and becomes a more important sector of our economy, that we need to take seriously what happens when people run from these type of instruments very quickly. And just like the money market funds caused a bad disruption in credit markets, I think a future financial stability problem could be occurring if we don't start thinking carefully about what happens to things like stablecoins next time we have a bad market difficulty.

BRIAN CHEUNG: All right, well a lot to chew on there but again the Federal Reserve Bank of Boston President Eric Rosengren stopping by Yahoo Finance. And I want to point out, by the way, that we did not call each other to coordinate this outfit today. But thanks again for stopping by here on Yahoo Finance for right now we'll toss it back over to you Kristin.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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