To cut interest rates or not to cut interest rates. That’s the biggest question facing the Federal Reserve Open Market Committee when it meets at the end of this month, and Boston Federal Reserve President and CEO Eric Rosengren will be casting a vote.
Rosengren joined Marketplace host Kai Ryssdal to discuss the independent nature of the Federal Reserve and the health of the American economy. They spoke hours before Rosengren delivered a speech on central bank independence and accountability at the annual meeting of the Central Bank Research Association. Below is an edited transcript.
Ryssdal: Let’s get to this speech, first of all. The basic gist, your view on Fed independence, is that it’s OK for Congress to tell you what to concentrate on. Your point is that the Fed needs to be able to decide how it does its job, yes?
Rosengren: That’s exactly right. Accountability is a critical component of independence. And so Congress provides the requirement that we focus on a dual mandate, which is price stability and maximum employment.
But we have freedom to figure out how best to use our tools to get that outcome. So we’re not independent on outcomes, we’re independent on using our instruments to get those outcomes.
Ryssdal: How would you say the Fed is doing on the outcomes? Are you meeting the bar, as it were?
Rosengren: Well, I would say over the last month the data’s come in quite strong. The unemployment rate is close to a 50-year low at 3.7%. Payroll employment is quite strong, a lot of people are getting jobs. Over the last three months, we’ve created 171,000 jobs. The inflation rate is pretty close to our 2%. We’ve been a little softer than what we want. On the core inflation rate, it’s 1.6%. But if you look at taking out the big movements that are temporary, something called the Dallas Trimmed Mean, you’re right at 2%.
Ryssdal: What do you make, then, of those who say, and I’ll quote Neil Irwin here from the New York Times who we’ve had on the program saying, “You know, something’s weird, and maybe the old rules aren’t working anymore.” Chair Powell said the other day on the Hill that the Phillips curve, that relationship between unemployment and inflation, does not seem to hold anymore. Do you have the tools, and are you looking at things the right way?
Rosengren: Well, we do have the tools. One reason why you want flexibility for the Federal Reserve to use those tools is because relationships in the economy do change. One of the reasons why inflation’s not as tied to where the labor market is is because the Fed has been so effective at being very close to 2% inflation over the last three decades. So what we do actually has an impact on the economy, and relationships in the economy change over time, which is why you need to have some flexibility to get the right outcome.
Ryssdal: Do you think people understand what the Fed does? This is a little sideways, but it does seem kind of germane.
Rosengren: I think we’re a complicated organization to understand but I think we’re an important organization to understand, because it does have an impact on Main Street, as well as Wall Street.
Ryssdal: You are — to that end, the Main Street, Wall Street thing, right — you are, I think, the last Fed governor who will speak before the Fed enters its quiet period, before its next meeting. You all spend a lot of time on communication. The chairman does, you can’t turn around without a Fed governor making a speech, as you are today. What are you trying to tell people?
Rosengren: It’s important for people to understand how the economy is evolving and why we take the actions that we do, so it does get back to that accountability and the governance of the Fed, that 30 years ago chairs of the Fed prided themselves on being obscure. That’s no longer true. Being credible and transparent and thinking about communication are a much more important part of central banking than they were 30 or 40 years ago.
And that means we really want the public to understand that we are trying to get maximum employment and get stable prices over time. So sometimes people get confused that we’re focused on the stock market or the exchange rate or other types of financial variables. But the goal that Congress has given us is to focus on medium and longer-term goals related to prices and unemployment.
Ryssdal: You know, it sure does look like, and I say this with all respect, it does look like y’all are paying a lot of attention to the markets, lately, that you are attuned to how they are reacting. And I will point you just to yesterday and your colleague John Williams at the New York Fed, who gave a speech that said, “You know, you gotta cut when you gotta cut, and so look out below.” And then the market reacted, and an hour and a half, two hours later, the New York Fed had to walk it back and say, “No, no, no, this was just an academic discussion.” Talk to me about how you react to the markets, would you?
Rosengren: So we certainly pay attention to what’s happening in financial markets. Financial markets are signaling what’s happening in the overall economy, and people are investing dollars with a perspective on how the economy is going to evolve. So there is information from financial markets that we shouldn’t ignore.
But in the longer run, our goal is not to do something that, for example, on a temporary basis causes the stock market to go up but then decline sometime in the future. Which is why our mandated goals from Congress are really focused on inflation and unemployment, not those financial variables. The financial variables are useful to the extent that they’re affecting inflation and unemployment, but in and of themselves they’re not particularly relevant to our job.
Ryssdal: Back to where we started, this idea of Congress telling you what to concentrate on and then the Fed having the autonomy to do what it wants. Do you think Congress is telling you to do the right thing with a dual mandate — that is to say, low unemployment and stable inflation?
Rosengren: I do. Other countries have a different mandate, different countries do choose different mandates. In many other countries, they only have an inflation mandate. I think it’s actually quite important that we look at both the labor markets and prices, and a good example of that is that I think the Federal Reserve reacted much more actively during the great financial crisis than many central banks around the world, because they didn’t have that dual mandate. So I think it’s the right things to think about for the welfare of the American public, over time.
Ryssdal: I truly don’t want to get too far into what the president has to say about the Federal Reserve, and I know you don’t, either. And Chairman Powell has said to me and he has said to Congress and everybody who will listen that he’s sticking around and the Fed is politically independent and it should be. That said, it cannot be ignored that at your next meeting there is an expectation that you’re going to cut rates, which is what the president wants you to do. Discuss.
Rosengren: It’s very important that we’re data dependent. Earlier I mentioned that the outcomes from June till now have been quite good. I think we should continue to focus on that. But there are certainly uncertainties that we have to think about. One of those uncertainties would be whether we get a disruptive trade situation with China or with other trading partners. Another concern is what’s happening in some of our foreign trading partners; Europe and Japan are not doing nearly as well as we are. So I think those are considerations that we have to think about as well. But in the end we should be focused on the data and not be particularly swayed by anything else that’s going on.
Ryssdal: Is this the pause or, in fact, the rate cut, that everybody’s expecting — I’ll call it a pause because one never wants to predict the future — is this pause sort of a just-in-case pause?
Rosengren: My own view is that I’m not going to prejudge what we’re going to decide in a week and a half. My own view is that the economy is actually doing quite well and, at least to date, there’s not that much evidence in the data that the economy is slowing down. We’re probably going to get a GDP growth for the second quarter, around 2%. That’s certainly slower than how fast we were growing last year, which was closer to 3%. But nonetheless it’s faster than what the economy’s going to grow in the longer run, which I would estimate to be about 1.75%. So it’s actually a pretty good outcome, and my expectation is that the economy, over the course of this year, will continue to be growing at roughly 2%.
Ryssdal: I was going to let you go, but then you said 1.75% in the long term. That’s not good or high. Take your pick on the word you want to use.
Rosengren: Well, it depends on your framework. It used to be the population was growing much more quickly, the labor force was growing much more quickly and productivity was much higher. It isn’t good news to the extent that productivity hasn’t been as strong as we would like. But the demographic trends are something that’s affecting not only us, but Europe and Japan as well. And there’s not much the Fed can do about demographics. When you think about how fast the economy can grow, if you have a slowly growing population and the demographics are older, you’re not going to have the same kind of growth as if your population is expanding very rapidly.