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Federal Reserve Bank of Boston President Eric Rosengren said the U.S. economy remains “relatively strong” despite clearly heightened risks, leaving him unconvinced the central bank needs to cut interest rates at its upcoming meeting this month.
“If the consumer continues to spend, and global conditions do not deteriorate further, the economy is likely to continue to grow around 2%,” Rosengren said in the text of a speech he’s scheduled to deliver Tuesday in Easton, Massachusetts. At that pace, “with continued gradual increases in wages and prices, then in my view, no immediate policy action would be required.”
Rosengren’s remarks signal he may dissent again at the Sept. 17-18 meeting of the Federal Open Market Committee, at which policy makers are widely expected to lower rates by another quarter percentage point. That would follow a cut on July 31 which he voted to oppose, together with Kansas City Fed President Esther George.
Fed Chairman Jerome Powell characterized that move as a “mid-cycle adjustment” designed to guard against the possibility of a more serious slowdown in the face of rising global risks.Powell signaled in an Aug. 23 speech in Jackson Hole, Wyoming, that another rate cut was probably on the way at this month’s meeting in Washington.
The Boston Fed chief acknowledged that threats to his economic outlook are on the rise.
“Clearly, there is a downside risk that trade or geopolitical problems could escalate, resulting in a much weaker situation than is currently anticipated in economic forecasts,” he said. “To date, these elevated risks have not become reality.”
Rosengren, the longest-serving current member of the FOMC, said the key to his mostly positive outlook lies with consumer spending, which accounts for 70% of the U.S. economy, and has so far remained resilient due to a strong labor market and modestly rising wages.
He also played down the signals offered by the decline in long-term yields below short-term returns in the U.S. Treasury market. This so-called yield-curve inversion has often presaged recessions in the U.S.
While past instances have been triggered by the Fed elevating short-term rates to prevent economic overheating, this time it’s caused by a flood of foreign money driven into 10-year U.S. Treasuries away from negative yields in Japan and Europe, Rosengren said. Moreover, if recession fears were creating the inversion, he said, they should also be showing up elsewhere.
“Such a view does not seem to be strongly echoed” in stocks, corporate bond spreads or in economic forecasts, he said. “overall stock prices remain robust. Recession concerns do not seem to be reflected in the current pricing of stocks.”
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