Risks to the U.S. economy are higher today but have not dented the outlook enough to require aggressive action from the Federal Reserve, Boston Fed President Eric Rosengren said Sept. 3.
Rosengren, who voted against the Fed's July 31 rate cut, said he will "carefully watch" incoming economic data to see whether he would support changing rates at the central bank's next meeting Sept. 17 and 18.
But forecasts for the U.S. economy "remain benign" and suggest a healthy consumer sector should keep growth around 2% in the second half of this year, despite investors' worries about trade uncertainty and slower global growth, Rosengren said.
"Should those risks become a reality, the appropriate monetary policy would be to ease aggressively. However, to date, these elevated risks have not become reality, at least for the U.S. economy," Rosengren said in a speech at Stonehill College in Easton, Mass.
His comments are another sign of divisions at the Fed as officials prepare for their September meeting. Many investors believe the Fed will opt for another 25-basis-point rate cut, an expectation that Fed Chairman Jerome Powell declined to push back against during his Aug. 23 Jackson Hole speech.
St. Louis Fed President James Bullard, who is among the most dovish members at the Fed, said in a Reuters interview that officials should have a "robust debate" about whether they should cut rates by 50 basis points at the September meeting. Bullard told Reuters the Fed should take aggressive action given the "global shock" affecting the U.S. economy, where the manufacturing sector contracted in August for the first time since 2016.
Rosengren and several other Fed officials have opposed lowering rates, though not all of them vote on the rate-setting Federal Open Market Committee this year.
Trade uncertainty and weaker growth abroad are "key risks" worth watching, particularly given that China, Europe, Japan and other major U.S. trading partners are heavily dependent on global trade, Rosengren said.
"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," Rosengren said, noting that exports and fixed investment from U.S. businesses have slumped.
But if U.S. consumers, who make up roughly 70% of the U.S. economy, keep spending and global growth conditions "do not deteriorate further, the economy is likely to continue to grow around 2%," Rosengren said.
He also pushed back against worries that recent inversions in the Treasury yield curve are pointing to an impending economic downturn, as that bond-market development has historically indicated. Inversions occur when yields for longer-term Treasury securities fall below yields on shorter-term Treasurys.
Yields on longer-term Treasurys have dropped substantially in recent weeks amid rising fears about the global economy, with 10-year Treasury yields falling to 1.47% on Sept. 3, down from 2.66% at the start of 2019.
Still, Rosengren said, concerns over recession "do not seem to be reflected" in the stock market, which has fallen since late July but remains higher than it started the year. They also do not appear to be showing up in the corporate bond market, where investors are not demanding substantially higher returns for holding riskier investment-grade corporate bonds compared to 10-year Treasurys, Rosengren said.
"This spread, which would grow if perceived risks about private sector investments were heightened, is not unusually elevated, as we would expect if bond investors were concerned about a near-term recession," he said.
A possible explanation for the recent Treasury yield curve moves is that worries about U.S. trading partners' economies have pushed down longer-term interest rates in those countries, Rosengren said. Lower yields elsewhere would then depress long-term U.S. yields as global investors shift their money to U.S. Treasurys, raising their prices and therefore lowering their yields.
"We are wise not to place too much confidence in either interpretation, but instead watch closely for signs of risks materializing in the economic data," Rosengren said.
