Beckner: Erstwhile Fed Dove Rosengren Raises Inflation Alarm

Written exclusively for InTouch Capital Markets

13th April 2018

By Steven K. Beckner

Slowly but surely, the Federal Reserve’s inflation mood has changed – the latest straw in the wind being warnings from Boston Federal Reserve Bank Eric Rosengren.

From concern about disinflation and calls for radical monetary stimulus to push inflation to the 2% target, the consensus softened to residual worries about persistent undershooting, then moved to confidence tightening labor markets would eventually lift inflation to 2% and now to stirrings of concern that, without steady removal of monetary accommodation, the Fed could find itself behind the curve and have to raise interest rates more abruptly.

In a week when the March 20-21 Federal Open Market Committee minutes showed agreement that the price index for personal consumption expenditures will reach 2% “in coming months,” the producer price report showed an apparent build-up of inflation in the pipeline. The March producer and consumer price indexes both rose more than 2% year-over-year – 3.0% for PPI, 2.4% for CPI overall; 2.9% for PPI, 2.1% for CPI on a core basis. Adding to potential pressures are higher tariffs and a weakening dollar, although import prices were flat in March.

Against that backdrop, non-voter Rosengren challenged the FOMC’s March Summary of Economic Projections, warning “that labor markets may tighten more than the median SEP forecast suggests, and that inflation is likely to increase a bit more than the current median forecast by FOMC participants. Therefore, I expect somewhat more tightening may end up being needed than is currently reflected in the projected median for the federal funds rate.”

Rosengren, who resisted leaving the zero lower bound longer than most, cautioned against “overheating” and warned “an undesirable ‘boom-bust’ scenario may become more likely if unemployment moves far below where we expect labor markets to settle in the long-run.”

But don’t jump to the conclusion that the FOMC is about to tighten more aggressively. Official comments must be parsed in their full context. True, the minutes say a stronger economic outlook “implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.” And they note “all participants expected inflation on a 12-month basis to move up in coming months.”

However, the minutes add, “This expectation partly reflected the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation; it was noted that the increase in the inflation rate arising from this source was widely expected and, by itself, would not justify a change in the projected path for the federal funds rate.”

And don’t forget the preferred PCE inflation gauge still lags, rising 1.8% year over year overall and 1.6% core in February. If it hits 2%, it will be a cause more for relief and perhaps celebration at the Fed – not panic.