It is possible the US economy could reach the conditions on maximum employment and inflation that would merit an interest rate increase next year, but it will be important to watch the data, Boston Federal Reserve Bank President Eric Rosengren said.
Rosengren declined to provide his projection for interest rates, stressing the Fed’s policy will depend on economic data.
“But it wouldn’t surprise me based on the current projections of what we’re seeing in the data that that criteria could be met as soon as the end of next year,” he said during an interview with Yahoo Finance.
Rosengren said he expects the US economy to grow by about 7 percent this year, and for inflation to be slightly above 2 percent next year. While there is currently still slack in the labor market, the US economy could approach full employment by the end of this year or the beginning of next year, he said.
Fed officials agreed at last week’s policy meeting to leave interest rates near zero and to continue purchasing $120 billion a month in Treasury securities and mortgage-backed securities until there is “substantial further progress” toward the central bank’s goals of maximum employment and 2 percent average inflation.
Rosengren said he thinks the “substantial further progress” goal has been met for inflation, which he expects will slow down going into next year as supply imbalances are resolved.
He said the labor market may reach the Fed’s standard for tapering asset purchases before the start of next year.
“A lot depends on exactly what happens with the economy over the course of the summer and into the fall,” he said.
When the Fed starts to taper, it could consider trimming the purchases of Treasury securities and mortgage-backed securities by the same amount, which would end the purchases of mortgage backed securities sooner than Treasury securities, he said. But those details have not yet been finalized, Rosengren said.
Meanwhile, Minneapolis Federal Reserve President Neel Kashkari on Friday said he expects recent high inflation readings will not last and Americans will return to the labor market in large numbers in the fall.
“We should see a lot more labor supply in the fall,” Kashkari said in a virtual event hosted by the Minnesota Council of Nonprofits and the Minnesota Council of Foundations, once the three main factors holding back labor supply – the closures of schools and daycare facilities, fear of the coronavirus, and extra unemployment benefits authorized by Congress – have faded.
He said that in general he is a “big skeptic” of employers who complain of worker shortages, saying a large part of it is a reluctance to raise wages.
The US central bank is beginning a debate over when to start reducing its support for the economy now that the number of daily COVID-19 cases has dropped dramatically and the economy is reopening.
As a first step, Fed policymakers plan in coming months to discuss whether the economy has made “substantial further progress” toward the central bank’s goals of maximum employment and 2 percent inflation. That is the bar the Fed has set before moving ahead with any reductions to its $120 billion in monthly asset purchases.
The Fed hasn’t defined what it means by maximum employment.
Kashkari said the economy is down 7 million to 10 million jobs from where it would have been without the pandemic, and that he views maximum employment to be “at a minimum” getting those jobless Americans back to work.
Other policymakers appear less convinced that those jobs will all return, with several noting that many more Americans retired during the pandemic than normally would be expected, and it’s unclear that they will be returning to the workforce.
