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Fed’s Rosengren Says Pursuing 2% Inflation Could Distort Markets

Christopher Condon
Fed’s Rosengren Says Pursuing 2% Inflation Could Distort Markets

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Federal Reserve Bank of Boston President Eric Rosengren warned his fellow monetary policy makers against putting financial stability at risk in pursuit of higher inflation.

“I don’t think there’s a big cost to being a little below 2%,” Rosengren told Bloomberg Television in an interview Monday, referring to the central bank’s inflation target. “I’d rather be higher, but I wouldn’t want to distort financial markets to get that outcome.”

The Fed cut interest rates last month for the third time this year to preserve a record-long U.S. expansion and signaled that policy was now probably on hold if the economy stays on track. Rosengren dissented against all three cuts, preferring to keep policy unchanged.

U.S. growth has been dented this year by a weakening global economy and business uncertainty stemming from the trade dispute with China. Unemployment, though, remains near a 50-year low, helping to shore up consumer spending, which accounts for around 70% of the national economy. Inflation remains below the Fed’s 2% goal.

Rosengren agreed that the U.S. economy remains healthy and on track to grow at its long-run potential, around 2%.

“Despite the tariffs and the volatility that’s occurred in some of the financial market movements, we haven’t ended up in a very bad place,” he said.

The Boston Fed chief said the rate cuts concern him because the central bank will now have less room to lower rates in the event of a more serious slowdown. He also worries about provoking asset bubbles and market instability.

“Is this the stage of the cycle where you want to have a little more push to financial markets?” he said. “I would argue not.”

Asked what the Fed could do in the event of a downturn that pushed rates to zero, Rosengren said the U.S. economy would have to look to fiscal policy to prevent an extended recession.

Rosengren, like other Fed officials, said he wouldn’t favor the use of negative interest rates even in the event of a recession. He said he didn’t think they’ve been highly effective in fighting low growth and inflation in Japan and Europe.

Read more: Negative Rates Seemed Crazy. Now Comes the Backlash

The Fed’s highest profile critic, President Donald Trump, has repeatedly called on the Fed to lower rates much further and to consider matching the negative rates seen in other economies. Trump said he raised the topic of negative rates when he met Monday with Fed Chairman Jerome Powell.

Following the meeting, the Fed issued a statement saying Powell’s comments in the discussion were “consistent with his remarks at his congressional hearings last week” and that he “did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming information.” The Fed’s statement didn’t mention the topic of negative rates.

Rosengren’s interview followed remarks by fellow policy hawk Loretta Mester, chief of the Cleveland Fed, who said she would have preferred not to have cut rates last month and the central bank should take its time before adjusting policy again.

“We’re in a good spot right now to wait and see where inflation’s going and where the labor market and growth are going before we make another change in policy,” she told an audience at the University of Maryland in College Park on Monday. “We’re basically on hold.”

--With assistance from Michael McKee.

To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Jeff Kearns

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