Why Continuing to Remove Monetary Accommodation is Appropriate
Eric S. Rosengren President & Chief Executive Officer Federal Reserve Bank of Boston
Federal Reserve Bank of Boston, March 9, 2018
Over the past year, the unemployment rate has fallen and is now below even the lowest estimates made by Federal Reserve policymakers (FOMC participants) for the level that is likely to be sustainable in the longer run. As labor markets have tightened, we have seen a gradual increase in wages and salaries. While inflation2 is still a bit below the FOMC’s target, most forecasters expect inflation to rise to, or near, the Fed’s 2 percent target by the end of 2018.
Despite this good news, the stock and bond markets have become much more volatile in recent weeks. This likely reflects, in part, the realization that financial markets need to factor in the risk that wages and prices could grow too quickly, if there were too much fiscal and monetary stimulus – particularly with the economy currently at or beyond full employment and inflation approaching the Fed’s goal. I view the underlying insight as a healthy realization by market participants that the risks are two-sided: Unsustainably strong growth that leads to excessive inflation or financial imbalances is now as much a risk as growth that falls short. And there is a realization that monetary policymakers need to be vigilant in calibrating the level of accommodation, if continued sustainable growth is to be achieved.