The head of the Federal Reserve Bank of Boston predicts an "almost ideal" year for the U.S. economy in 2020, with inflation returning to a targeted 2%, continued strong labor markets, and economic growth remaining close to potential.
Boston Fed president and CEO Eric Rosengren told about 500 business leaders at CBIA's Jan. 13 Economic Summit + Outlook 2020 that private-sector forecasters paint an equally bright picture.
"They expect the unemployment rate to remain at the 50-year-low, they expect the inflation rate to get back up to 2%, and they expect the growth rate of the GDP to be roughly 2% as well, so that actually is a very optimistic outlook," Rosengren said.
"This is what a soft landing actually looks like. It's about as good an outcome as we could have hoped for."
But there are still risks.
"One implication of low inflation and low nominal interest rates is that there is very little room for monetary policy to react to an economic downturn by reducing rates," he said.
"We haven't had unemployment rates this low with monetary policy interest rates this low for quite some time, so one of the risks is that inflation picks up faster than we are currently anticipating.
"Central bankers do not have much historical experience with extended periods where interest rates are running below the estimated equilibrium level while unemployment rates are, simultaneously, historically low. So we want to be alert to any potential risks emerging."
A second concern is the potential impact on markets.
"We've got to be concerned in an environment with a very low unemployment rate that, potentially, we can start seeing bubbles emerging in financial markets," he said.
Rosengren said national GDP is estimated to grow by about 2% over the next few years.
"That doesn't seem like a very big number but you've got to remember that when the unemployment rate is already very low, the only way we can grow a lot faster is to bring more people into the workforce," he said.
Wages are growing at around 3% annually but some of those increases are coming out of profits, not increased profitability.
Rosengren said productivity has been at around 1%, much lower than it was 10 to 20 years ago.
"Over the last couple of years, wages have been growing a little more quickly, prices haven't been going up so quickly, so some of that has come out of profitability relative to GDP," he said.
"We are seeing some resistance to raising prices at this point, but at some point we would expect wage increases to start flowing through to prices because you can't keep having the profit margins reduced."
Rosengren noted that if wage growth outpaces productivity gains, employers may be unable to absorb rising costs, generating inflationary pressure.
And with interest rates also low, there is a chance the labor market could reach "unsustainable levels," causing wages and inflation to grow faster than expected.
The Fed estimates that unemployment will remain at its current 50-year low of 3.5%.
"That's quite a good outcome in terms of labor markets," Rosengren said.
He also said he doesn't expect the Fed to lower interest rates this year unless something drastic happens.
"A pretty benign outlook has interest rates not moving much over the course of this year," he said.
"It's also an election year. We tend to not move dramatically in an election year unless there's pretty strong evidence from the economic data that we need to."
Connecticut has its share of economic challenges, with a labor market that's yet to recover from the 2008-2010 recession and GDP growth that has largely trailed the region and country for a decade.
"In Connecticut, when I talk to business leaders, they tend to be more negative than the economic data, to be quite honest," Rosengren said.
"People have been very concerned about what's been happening in Connecticut but Connecticut has a very low unemployment rate.
"So when I talk to businesses, not only in Connecticut but around New England, one of the challenges is continuing to get the kind of workforce that we need."
Reporters later asked Rosengren about a Dec. 31 Federal Reserve Bank of Philadelphia report warning that Connecticut was one of nine states at risk of economic contraction over the next six months.
"Economists aren't very good at actually predicting downturns, and that's true at the national level and it's even more true at the state level," Rosengren said.
"My own personal view is that Connecticut probably is not as susceptible [to contraction] as being on that list might imply."
Connecticut's unemployment rate is 3.7%, two-tenths of a point higher than the national rate.
The low unemployment rate, and the state's shrinking population—six straight years of declines through 2019—have left Connecticut businesses, especially manufacturers, searching for skilled workers.
"It becomes very important to think about workforce development because if you're not getting people to come to Connecticut, then you have to encourage people currently not working to get back into the labor force," Rosengren said.
That includes people in Connecticut's cities.
"This is the time for those people to get those skills for the labor force participation rate to rise in areas it hasn’t risen," he said.
"We should continue to focus—not only in Connecticut—but all of New England on some of our smaller cities.
"That is where labor is tending not to be used as effectively and we need to bring those people back to the job market. That will help with some of the labor shortages."
Rosengren noted that fewer immigrants entering the country was among the factors that could hold the economy back.
"To the extent that we restrict [immigration] in a particularly tight economy is actually restricting how we would otherwise grow," he said.
He also said that tariffs "in general are not particularly good news for the U.S. economy or the global economy. There's not much upside there."
Responding to a question from the audience, Rosengren said he did not believe the first phase trade agreement between the U.S. and China would alleviate concerns as it was not "a complete trade deal."
"Any kind of tariff particularly affects the businesses being tariffed and, more than likely, any tariff we put on is going to result in whatever countries being affected doing the same thing to us," he said.
"The hope is we get to a stage where we don't have to use tariffs to encourage fair trade."
He noted that the trade battles, along with the presidential election this year, create uncertainty among businesses.
"The channel I'd be more worried about is business uncertainty," he said.
"Some businesses may delay major investments and consumers may put off major purchases until after they know what to expect for tax policy."