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January 13, 2020

Boston Fed CEO: U.S. economy looks healthy for 2020, with some uncertainties

HBJ Photo | Matt Pilon Boston Fed CEO Eric Rosengren discusses the economy with CBIA CEO Joe Brennan at CBIA's annual Economic Summit and Outlook event in Hartford.

The Federal Reserve’s top New England official said Monday that the outlook for the national economy is “very optimistic” and about as good an outcome as we can hope for.”

Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston and a member of the Federal Reserve’s Federal Open Markets Committee, keynoted the Connecticut Business & Industry Association’s annual economic forecast event in Hartford on Monday.

The Federal Open Markets Committee, which makes decisions on interest rate movement and monetary policy, is forecasting “favorable” and “stable” economic growth, unemployment levels and inflation in 2020, but several uncertainties bear watching, Rosengren said.

“Actually the economy is doing quite well,” Rosengren told the audience of more than 400 people. ”People have been very concerned with what’s happening in Connecticut, but Connecticut has a very low unemployment rate as well.”

What’s unusual and bears watching, Rosengren said, is that inflationary pressures have not emerged, even with unemployment rates at historic lows, and short-term interest rates below 2 percent for most of the past decade.

The “federal funds rate” stands at 1.55 percent, following three reductions in 2019, which means central bankers could be lacking a key tool in their monetary-policy toolkit to blunt negative economic shock when the next recession comes -- reducing short-term interest rates.

“In a normal recession, we drop the rate by 4 or 5 percent,” Rosengren said. “It’s hard to reduce 1.55 percent by 4 or 5 percent.”

Central bankers have some other tools at their disposal, but they also don’t have much historical experience with extended periods of low interest rates and inflation coupled with a tight labor market, making it even harder to make predictions.

“So we want to be alert to any potential risks merging,” Rosengren said.

Persistently low rates could spur consumers and businesses to take on riskier investments, particularly in real estate, which has played a key role in prior recessions, Rosengren said. 

Another risk, though it’s one that Rosengren said could have some positive impacts, is if inflationary pressures build more quickly than expected. For example, if employers are unable to absorb rising costs -- including state minimum-wage increases in Connecticut and other states -- it could help spur those pressures. 
 

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