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| Building a National Campaign for a Strong Economy: Fed Up
Published By:Hartford Courant

When To Raise Rates? Boston Fed Chief Pokes Fellow Liberals

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, has been famous as an inflation dove – until now.

Being a dove means he almost always favors smaller and fewer interest rate increases by the Fed, in the hope that more money from the spigot will lead to more jobs and wage increases for workers. Rosengren and Janet Yellen, the Fed chair, have led the dove charge in recent years.

But on Wednesday, Rosengren dissented when the central bank postponed a rate hike at least until December. That surprised his fellow dovish liberals because, to oversimplify, lower rates tend to help workers, while higher rates, making money harder for borrowers to get, can protect accumulated wealth by warding off inflation.

The pro-hike dissent was his first in almost 10 years as a Fed governor; he has certainly opposed rate hikes and urged faster cuts, sometimes with formal dissents.

The move ignited debate not along the usual lines of doves and hawks – those who favor rate hikes to control inflation even before it appears – but between doves and doves, in much the same way that, for example, foreign trade deals divide liberal Democrats.

All of this might seem like an esoteric spat to Joe Grabasandwich, as my old politics professor used to say. But it lies at the heart of how the central bank can prod the economy to help more people, sooner. And it matters especially in Connecticut, where growth is slow even in good times, making rate hikes hurt worse than elsewhere.

On Friday, Rosengren explained his dissent in a public statement in which he said the economy is stronger than many people think.

"By 2019, I expect the unemployment rate to have declined below 4.5 percent," Rosengren said in the statement. "While I have a long track record of advocating for policy that supports robust labor market conditions, that is below the rate that I believe is sustainable in the long run."

What Rosengren is saying is that a 4.5 percent unemployment rate is so low that it would heat up the economy to the point of inflation above 2 percent, and that's the big no-no the Fed is trying to prevent – a clear charge to anyone who remembers the nightmare of the 1970s.

Taking the medicine of a one-quarter of 1 percent rate increase now, immediately, will, in his view, allow for relatively low rates over the long haul. That's part of the so-called soft landing from an expansion that is so hard to achieve.

Not so fast, left-leaning economists say. Or rather, not so slow. In the big picture, economist Jared Bernstein said, workers only see wage increases when the unemployment rate is at or near full employment – as we saw in the Sept. 15 Census report. The report showed a robust 5.2 percent 2015 jump in the income of households at the middle of the scale.

Did Eric Rosengren, of all people, turn his back on this?

"I've always considered him sympathetic to my view, which is that the last thing you'd want to do is tap the brakes and slow down job growth at a time when the economy is finally starting to...help people who have been left behind," said Bernstein, a senior fellow at the Center on Budget and Policy Priorities and author of a new book, "The Reconnection Agenda: Reuniting Growth and Prosperity."

Bernstein, a former chief economist for Vice President Joe Biden, doesn't believe Rosengren is suddenly looking out for capital at the expense of labor. Rather, the issue comes down to the murky relationship between inflation and unemployment.

The financial media widely reported Rosengren's 4.5 percent jobless figure Friday. But in itself, it's not news, considering the rate is now 4.9 percent. The real news, Bernstein said, is that Rosengren thinks he can tell when too hot is too hot, without data.

Rosengren, in a visit to New Britain in April, explained that the "natural" or "full" rate of employment, the level that delivers the maximum benefits to the economy without accelerating inflation, will be reached when the jobless rate is 4.7 percent.

The trouble with that view, Bernstein said, is that "it is widely understood by people who look very closely at this question that we cannot reliably estimate that rate within 2 points one way or another."

There are too many variables in play, such as productivity and distribution of income, so, why risk punishing workers by applying certainty to a mystery?

Rosengren explained, in his statement Friday: "My goal is to achieve a long and durable recovery – a sustainable expansion...I believe a significant overshoot of the full employment level could shorten, rather than lengthen, the duration of this recovery."

As I noted when Rosengren visited in April, his view of the economy, literally, from his downtown Boston office, is full of cranes in the torrid market of a red-hot city. Is that coloring his fear of inflation? Maybe.

No one thinks another quarter-point increase in the Fed's overnight borrowing rate, after last December's uptick, will make a big difference by itself. But the signal the Fed sends can and does move markets and the economy.

"If we want this recovery to reach down and help people it has yet to reach, that's inconsistent with even a small rate increase," Bernstein said. "Where's the inflation?"

"It's gradually coming up," Rosengren told a Quincy, Mass. audience on Sept. 9.

That's the $15 trillion debate as the U.S. economy either is, or is not, nearing its speed limit.

By Dan Haar