Boston Fed's Rosengren: Temporary inflationary pressures to continue 'a little longer' than expected
Federal Reserve Bank of Boston President Eric Rosengren said Friday that rising inflationary pressures still appear to be temporary, shrugging off new data showing prices rising at rates unseen since 1992.
Rosengren told Yahoo Finance that he expects prices to continue surging since airfare, hotel, and rental car prices still have yet to reach pre-pandemic levels.
“It’ll continue maybe a little longer than we were expecting, but I think the best guess going forward is that when we get into next year we’re going to be seeing inflation just barely above 2%,” Rosengren said.
Data from the Bureau of Economic Analysis released Friday morning showed the personal consumption expenditures index rising by 3.9% year-over-year. When stripping out food and energy prices, the index saw a 3.4% year-over-year increase, the fastest pace seen since 1992.
[Read the full transcript of Yahoo Finance's interview with Boston Fed's President Eric Rosengren.]
The Fed’s inflation target is 2%, but the central bank’s history of undershooting that target spurred the central bank to tweak its thinking to allow for “moderate” overshoots.
For Fed policymakers, the question is if the higher readings are due to temporary factors (like supply chain bottlenecks) or more deeply-rooted and persistent factors.
Inflation appears to be bouncing back at a much faster speed than the recovery in the labor market, where May jobs data showed the economy still 7.6 million jobs short of pre-pandemic levels.
Rosengren said fears of contracting the virus and childcare concerns remain barriers to returning to the workforce. But Rosengren expects the headline unemployment rate to dip from 5.8% to the “mid-fours” by the end of the year, with the Fed reaching full employment as the economy gets into next year.
“I think we have to be pretty humble about what’s going to happen with inflation and labor markets,” Rosengren said. “This is going to be a time where we should be particularly data-driven.”
Next steps for the Fed
Rosengren’s comments expressing the view that inflation still looks “transitory” comes as the central bank at large shifts its focus toward pulling back on its aggressive easy money policies.
In the depths of the pandemic, the Fed slashed interest rates to near-zero and fired up an asset purchase program that is currently absorbing about $120 billion a month in U.S. Treasuries and agency mortgage-backed securities.
Last week, the central bank began conversations on slowing the pace of the so-called quantitative easing program. The Fed also signaled that two interest rate hikes were possible by the end of 2023 — earlier than some Fed watchers had expected.
Rosengren declined to say where he forecast interest rates in last week’s economic projections but said “it’s quite possible” that the Fed could liftoff on rates “around the end of next year.”
On the timing of a taper, Rosengren said it is “quite likely” that the Fed will hit its criteria for slowing the pace of its asset purchases “prior to the beginning of next year.”
The central bank’s next policy-setting meeting is scheduled for July 27 and 28.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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