Fed policymaker says market is too pessimistic on rate path

File photo of President the Federal Reserve Bank of Boston Eric Rosengren.
File photo of President the Federal Reserve Bank of Boston Eric Rosengren.PHOTO: BLOOMBERG

WASHINGTON (BLOOMBERG) - The market's outlook for interest rates is too dovish for one of the Federal Reserve's more dovish policymakers.

Federal Reserve Bank of Boston president Eric Rosengren said he and many private-sector economists envision a "much healthier US economy" than the forecast implied by financial markets, where investors expect the Fed to raise rates by about one-quarter percentage point a year over the next three years.

"The very shallow path of rate increases implied by financial futures-market pricing would likely result in an overheating that necessitates the Fed eventually raising interest rates more quickly than is desirable, which could endanger the ongoing recovery and continued growth," Mr Rosengren said, according to the text of a speech he was scheduled to deliver on Monday (April 18) in New Britain, Connecticut.

Mr Rosengren, a voter this year on the policy-setting Federal Open Market Committee, made his remarks eight days before the FOMC is scheduled to gather in Washington to share officials' views on the economy and set the benchmark federal funds rate. Some committee members have said they don't expect a move, and investors put the chance of an April rate hike at zero. Market participants, in fact, don't see another rate increase probable until next year.

While acknowledging a slowdown in the first quarter, Mr Rosengren said he expected growth in the US to pick up in the second quarter and the employers to continue adding jobs. Unemployment was 5 per cent in March, down from its recession peak of 10 per cent in October 2009.

"While there have been significant headwinds from abroad, and market turbulence related to those headwinds, I view the US economy as fundamentally sound and likely to perform better than the domestic economies of most trading partners," he said.

Mr Rosengren said he favoured pushing unemployment somewhat below 4.7 per cent - his estimate of full employment - in order to pull more people back into the workforce.

"Probing just how low the unemployment rate can fall before risking overheating in the economy can be beneficial for labour markets," he said.

That would go hand-in-hand with "a gradual normalisation of interest rates," but not with the "the extremely shallow rate path" envisioned by investors.

Moving at the pace predicted by financial markets, he said, would risk pushing unemployment too low, forcing the Fed to raise rates quickly in order to prevent inflation well above its 2 per cent target.

"We are currently at an unemployment rate where such a large, rapid decline in unemployment could be risky," he said. "I would prefer that the Federal Reserve not risk making the mistake of significantly overshooting the full employment level."