The recent volatility in financial markets is not matched by economic data indicators such as strong U.S. labor markets and consumer sentiment, Boston Fed President Eric Rosengren said at a Jan. 9 meeting of the Boston Economic Club.
Financial markets "are reflecting a [worse] outcome more than I am," Rosengren said. The S&P 500 Index was down 14.3% in the last quarter of 2018, while the Dow Jones Index dropped 12.5%. Sentiment in the markets is "unduly pessimistic," he said.
More striking, he said, was movement in the 10-year Treasury yields, which are currently at around 2.7% after peaking at slightly over 3% in early November. "My own forecast is more uncertain now than I would have said before the financial markets movements," he said.
Because economic conditions and markets are sending different signals, Rosengren believes the central bank does not have to make a decision right now.
"This is a good time to be data dependent; there shouldn't be a particular bias right now toward tightening or toward easing," he said, adding that he agreed with Fed Chairman Jerome Powell's assessment that "we are not on a preset course."
Rosengren said he considered the Fed to be "mildly accommodative" at this point, and that the two rate hikes projected by Fed officials at their December 2018 meeting would bring monetary policy close to the neutral rate, or the rate the Fed views as neither slowing nor boosting the economy.
One positive aspect of market volatility is that it makes market participants more cognizant of risk, he said. "One of the things I worry about is financial stability when we've had accommodative policy and this kind of volatility makes [people and firms] pare back the risk."
Noting that investors have pulled back from the high-yield and highly leveraged loan markets, "pulling back is a good thing," he said.
Rosengren is a voting member of the Federal Open Market Committee this year; analysts see him as a moderate in his economic views.
Earlier on Jan. 9, Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic weighed in on the economic outlook. Evans highlighted the strength of the U.S. economy, though he also acknowledged trade tensions, the government shutdown and Brexit as obstacles to continued expansion. Bostic counseled patience and said he did not see a need for the federal funds rate to be pushed above neutral at this point.
Evans is a 2019 voting member of the Federal Open Market Committee, while Bostic rotated off this year.