Rosengren: Fed may have to tighten policy more quickly than forecast

A senior Federal Reserve official said on Wednesday that the potential for an “overshoot” in US economic growth may justify a “more rapid” tightening in monetary policy than the central bank had forecast in December.

US economic growth this year and next could exceed the Fed’s estimates, with the jobless rate having already fallen near its normal level, said Eric Rosengren, head of the Boston Federal Reserve, in prepared remarks for a speech in New York.

If that situation were to materialise, “it is reasonable to expect additional labour market tightening, gradual increases in inflation and, potentially, emerging imbalances in some asset markets,” he warned.

He added that since the inflation rate is also approaching the Fed’s 2 per cent target – and indeed has reached it, according to certain measures – “the Federal Reserve risks ‘overshooting,’ potentially jeopardising the very significant progress of the US economy since the financial crisis”.

Mr Rosengren argued that it would be “appropriate” for the Fed to increase its benchmark lending rate three times this year as it had forecast in December, or “possibly even a bit more rapidly than that forecast”.

While Mr Rosengren is not a voting member of the Fed’s policy-setting board this year, his remarks are significant, since he was once considered to be on the dovish side of the spectrum but has shifting towards a more hawkish stance.

Wall Street is currently anticipating a roughly 45 per cent chance of three or more rate increases this year, according to calculations by Bloomberg based on federal funds futures.

That probability has increased from 41.8 per cent on Tuesday as traders eyed data suggesting consumer prices grew in January at the quickest rate since 2012.

Faster-than-expected inflation “strengthens the case” for the Fed to raise rates sooner rather than later, said Citigroup economist Andrew Hollenhorst, adding that upbeat January retail sales data add further support to the case.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.