Quick Recap: Eric Rosengren

"The Federal Reserve must respond as vigorously to inflation that is too low as we have, historically, when inflation has been too high."
"Policymakers should remain patient about removing accommodation until it is clear that we are on the path to achieving [our] 2% inflation target..."- Eric Rosengren 

President and CEO of the Federal Reserve Bank of Boston Eric Rosengren gave a rather short presentation tonight on the implications of low inflation. His main point: the Fed needs to respond to inflation that is too low as forcefully as it would to inflation that is too high. Rosengren's main concern is the current US inflation rate, which stands below the Fed's 2% target. With interest rates remaining near zero after QE, another obstacle for the Fed is deciding when to start raising rates to a more normal level.  Rosengren suggests that the Fed should be patient in the process of raising interest rates until inflation reaches a level closer, or at 2%. Why is it so hard to raise inflation rates right now? According to Rosengren, major factors are the general fall in commodity prices, including oil and agriculture and the appreciating dollar. Rosengren used Japan and Europe as examples of the risks of letting inflation rates slip, leading to deflationary responses in the economy. This contributes to another concern: the Fed's loss of creditability from its inability to reach its target rate, ultimately lowering consumer and producer expectations.  After using graphical evidence to present the association between high unemployment/ lower inflation (low unemployment/ higher inflation), Rosengren expressed his goal of reaching an even lower unemployment rate of 5.25% (in comparison to the current 5.8%).

Rosengren's talk was more informative than provocative. The talk was very relevant to class material and I enjoyed hearing his summary and "safe" opinions on issues in current monetary policy.  If you missed it, revisit The Economist article we read a few weeks ago - it overlaps with many of Rosengren's points about the dangers low inflation.