Outlook: Rate Hikes, Trade Uncertainty, Stimulus Hangover


With the U.S. economy chugging along, unemployment low, and inflation in check, expect three interest rate increases this year, the President and CEO of the Federal Reserve Bank of Boston said Jan. 9.

“If we’re pretty close to where we want to be for inflation and unemployment, we should have an interest rate that’s more normalized for those kinds of conditions,” Eric Rosengren told about 500 business leaders at the CBIA/MetroHartford Alliance Economic Summit + Outlook.

Boston Fed President & CEO Eric Rosengren

“The U.S. economy is actually doing reasonably well,” the Boston Fed’s Eric Rosengren told business leaders.

“I think we still have the ability to (raise rates) relatively gradually, certainly more gradually than the measured pace under (former Fed) Chairman (Alan) Greenspan, but probably not quite as leisurely as we’ve done it over the last three years.”

Failure to raise rates on a more regular basis could risk inflation, he said.

However, Rosengren noted that the Fed’s strategy has worked. He credited the Fed’s slow increase of interest rates with helping to keep inflation in check after the recent Great Recession and grow jobs at a slow but steady pace.

“The U.S. economy actually is doing reasonably well. While it’s been a long haul, it’s an even longer haul for many of our trading partners,” he said.

“I think that, in part, reflects the fact that monetary policy was so aggressive so early on, that we’ve actually come out of this a little bit more quickly than many of our trading partners.”

The Fed raised interest rates by a quarter point in December 2016, only its second increase this decade.

Rosengren said policy makers indicated they would raise rates three more times this calendar year.

Strong National Economy

Rosengren described a national economy that has, overall, recovered from the recession, even if pockets remain where local economies aren’t as strong.

Nationally, unemployment is at 4.7%, and inflation is near the coveted 2% rate, considered ideal for price stability and maximum employment.

“I think we’re basically at full employment right now,” Rosengren said.

“If I have a meeting with business people, the first thing they complain about is that they can’t get enough qualified workers.

“So we are getting to the stage where we’re going from needing to more jobs for people overall to a situation where we‘re going to have labor shortages in many parts of the country.

“We need to be thinking a lot more about workforce development.”

Boston Fed's Eric Rosengren

The first thing businesses complain about is they can’t get enough qualified workers.

(CBIA has been a longtime workforce development advocate, and its not-for-profit Education & Workforce Partnership works with local manufacturers and area schools to expand the talent pipeline.)

While Rosengren sees a strong national economy, Joe Brennan, CBIA president and CEO, said he’s seeing positive signs in Connecticut, including many state businesses that are investing in their personnel, facilities, or both.

Brennan also said he believes that state lawmakers finally understand that the only way Connecticut is going to escape its fiscal problems “is to grow our economy.”

Ryan Sweet, director of Real Time Economics with Moody’s Analytics, noted that Connecticut’s largest exporting destinations are Germany and France, and predicted the dollar will continue to gain against the euro.

The combination of a stronger dollar and a pending election in France is “going to create uncertainty” and could weigh on exports Connecticut businesses make to France, Sweet said.

Job Market Tightening

Rosengren noted that the unemployment rate among people with at least a bachelor’s degree is 2.5%, and that some job markets that only require a high school diploma are also becoming tight.

More people are coming into the labor market while many people of retirement age remain working.
The tight job market is one more reason to raise interest rates, Rosengren said.

Sweet predicted job growth in the education, healthcare, hospitality, and retail sectors, and expects that the finance, securities and banking industries will do well this year.

But Rosengren said it would be difficult to predict how the economy may fare under a new president without knowing the administration’s fiscal policies.

Moody's Analytics' Ryan Sweet

Moody's Analytics' Ryan Sweet (pictured with Webster Bank economist Nick Perna) predicted a "fiscal stimulus hangover" for 2020.

“There are a lot of uncertainties,” he said.

"One of those uncertainties is exactly what is the fiscal policy package that we’re going to be dealing with? How much of it is going to be tax cuts?

What’s going to happen to the corporate side of the tax cuts? What’s going to be happening with infrastructure spending?

“There are a number of different proposals that have been thrown out.

Until we get a little more clarity there, it’s going to be a little bit hard to exactly predict where the economy is going to be.”

Sweet believes the post-election impact on the economy will involve a “more traditional boom-bust cycle over next few years” that will include tax cuts, spending increases, and strong growth in 2018 to 2019 with close-to-full U.S. employment.

Sweet predicted a “hangover of fiscal stimulus” will set in from 2020 to 2021.

Any tax reform from the Trump administration will have a small boost on the state economy later this year, Sweet predicted, but the state’s economy will really feel these benefits in 2018 and 2019.

Tariffs Would Hurt Connecticut

Rosengren and Sweet agreed that any efforts by the new administration to introduce tariffs would be a major mistake.

Any such move would particularly hurt Connecticut’s economy, Sweet said.

Rosengren spoke for a strong central bank after being asked about potential Republican efforts to pass legislation to limit the Fed’s power and independence.

“If you look around the world, central banks that are independent have tended to be the central banks that perform the best," Rosengren said.

"We should continue to have an independent central bank that certainly gets oversight by Congress."

Any effort to politicize the Fed would be unfortunate, he added.


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