Fed's Rosengren: Policy Normalization Will be Gradual Regardless of Liftoff Date

Sep 1 2015 | 5:22pm ET

By Jonathan Spicer (Reuters) - The Federal Reserve will probably only gradually raise interest rates, irrespective of whether it decides to take the first step a few months earlier or later, a top U.S. central banker said on Tuesday.

The dovish president of the Boston Fed, Eric Rosengren, said a more modest policy tightening cycle than in the past is appropriate because of low inflation and threats to U.S. economic growth.

Dodging the question of whether he would prefer to start hiking rates at a Sept. 16-17 policy meeting, Rosengren, who does not have a vote on the Fed's policy committee until next year, said U.S. inflation could come under yet more pressure if the economies of China, Japan, and the euro zone slow down, and if recent market turmoil persists.

"There are very good reasons to expect a much more gradual normalization process than occurred in the previous two tightening cycles," he said of pending rate hikes, adding, "this more modest tightening path is both necessary and appropriate."

Rosengren downplayed the timing of so-called liftoff, saying it makes little economic difference whether it is moved "forward or backward by a couple of months."

A recent stock market selloff, which accelerated on Tuesday, was sparked by fears of slower Chinese growth, which could keep U.S. inflation below target. The turmoil has given some Fed officials pause, and prompted investors to cut their predictions of a September U.S. rate hike to about 32 percent.

U.S. stocks continued to fall after Rosengren's comments, and the dollar index briefly added to losses.

Addressing the Forecasters Club of New York, Rosengren stressed that the Fed's preferred inflation measure was 1.2 percent, and has remained below a 2-percent target for a few years.

"We want to be credible. We don't want to systematically miss on our target," he said, adding inflation "should be above and below (target) roughly half the time."

The comments suggest central bankers will grapple with the question of reputation at this month's policy meeting, where some opposing Fed officials will argue that economic and labor market strength signal the Fed should promptly hike rates for the first rate hike in nearly a decade.

Rosengren highlighted the previous two monetary tightening cycles that began in 1994 and 2004 and concluded that, this time around, the Fed's key policy rate may end up lower.

Recent evidence of "slowing of foreign economies, ... volatile stock prices and falling commodity prices" might influence U.S. economic growth to the extent that the jobless rate, at 5.3 percent now, may not continue to fall and boost wages as expected, he said.

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