Economy Remains ‘Relatively Strong,’ Says Boston Fed Prez

Boston Fed president Eric Rosengren says the “headline-grabbing” market moves of this summer obscure the fact that the economy remains “relatively strong” despite clearly heightened risks.

The longest-serving current member of the Fed’s Federal Open Market Committee - and one of just two Fed officials who voted against the July interest-rate cut - Rosengren reaffirmed his stance that the central bank will not need to cut interest rates again at its meeting later 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%,” he said in a speech at The Leo J. Meehan School of Business at Stonehill College 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 said he wasn’t too concerned about August’s 800-point drop in the Dow Jones Industrial Average while downplaying the “inverted yield curve” in the bond market that has been a reliable indicator of an impending US recession.

He said past recessions have been triggered when the Fed elevated short-term rates to prevent economic “overheating,” while this time the inverted curve has been caused a flood of foreign investments in 10-year U.S. Treasurys. Rosengren added that if recession fears were indeed creating the inversion the fears should be evident elsewhere in the economy.

“Such a view does not seem to be strongly echoed in stocks, corporate bond spreads, or economic forecasts,” he said. “While both indices are down a little more than 3% from their July highs, overall stock prices remain robust. Recession concerns do not seem to be reflected in the current pricing of stocks.”

Optimistic due to a strong labor market and moderately rising wages, Rosengren 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.”

The Federal Reserve remains split on the issue of interest rate reductions, as many want to see more easing during a volatile time for the economy. St. Louis Fed President James Bullard, a leading dove, said that he wants to see a 0.5% rate cut at the policy meeting scheduled for September 17 to 18.