Eric Rosengren, president of the Federal Reserve Bank of Boston.
“Volatility by itself isn’t a bad thing, it’s just reflecting there’s a lot of uncertainty in the market,” Rosengren said in an Oct. 17 interview in Boston. “Just because we’re seeing volatility in the last two weeks isn’t enough to have me fundamentally change my forecasts.”
Rosengren said he believes the Federal Open Market Committee should halt bond purchases as planned when it meets Oct. 28-29, ending its campaign of so-called quantitative easing. He added the program could be extended if there is additional erosion in the outlook for economic growth.
“If we get a lot of information in the next week and
a half that indicates there’s a much more severe problem, I wouldn’t rule it out,” he said.
Rosengren, a consistent supporter of Fed stimulus who initially opposed the central bank’s decision to start slowing the pace of bond-buying, doesn’t vote on the FOMC until 2016.
U.S. stocks had one of their most volatile five days since the financial crisis, with the Standard & Poor’s 500 Index ending the week down 6.2 percent from the record high set last month. Volatility in U.S. Treasuries climbed the most since the “taper tantrum” of 2013 amid record trading volume.
The turmoil began not long after minutes of the September FOMC meeting, released Oct. 8, showed members had growing concerns over slowing global growth. Fed Vice Chairman Stanley Fischer reinforced that message in an Oct. 11 speech.
Rosengren said he hasn’t seen enough change in “real” economic trends to explain fully the recent swings in financial markets. While Europe has looked “a little weaker,” and other factors, like fear of an Ebola epidemic, have heightened investor uncertainty, he is sticking with his forecast that the U.S. will grow at an annual rate of 3 percent in the second half of 2014 and into next year.
“I’m not sure we’ve been surprised on the real side,” he said. “I’m not sure we’ve been surprised on the inflation side either.”
He said his own standard for ending the Fed’s bond purchases was “substantial improvement in labor markets.”
“Unemployment is at 5.9 percent, so I think we’ve met the hurdle,” he said.
If new data pushed the Fed to ease again, Rosengren said the central bank had a number of options, including simply keeping its benchmark interest rate near zero.
“We could stay at the zero lower bound for longer. We could decide to raise rates at a more gradual pace. It’s not clear to me that continuing QE would necessarily be the best way to address concern,” he said.
Rosengren, speaking on the sidelines of a conference at the Boston Fed on economic inequality, counseled more caution in reacting to the plunge in oil prices.
Brent crude has declined more than 20 percent this year amid rising supply and signs of lower global growth. That could hinder the Fed’s efforts to bring inflation in the U.S. back to its 2 percent target.
“We should look at oil, but we shouldn’t give undue weight to one price that moves a lot,” he said. “Monetary policy is not a particularly good instrument to target the price level of an individual commodity.”
He said lower oil prices would help the U.S. economy.
“It should be very good news for consumers as people have more disposable income because they’re not spending as much on fuel,” he said.
“But you have to think about what the reason is for why oil prices are going down. If it’s because you think demand is down worldwide that may not be a particularly good thing,” Rosengren said. “If it’s a supply story, I think it’s a very positive story for the consumer.”
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