Fed likely to raise interest rates in Dec: Rosengren

Three or four more hikes expected in 2018, depending on inflation

The Federal Reserve will probably need to raise interest rates in December and then three or four times “over the course of next year,” assuming the US unemployment rate continues to fall and inflation rises, Boston Fed President Eric Rosengren said.

If inflation reaches the Fed’s goal while the unemployment rate, now at a 16-year low of 4.2 percent, is below 4 percent, that may be a signal that the economy could be overheating, Rosengren suggested in an interview.

To stabilize inflation at 2 percent, Rosengren said, “you might have to overshoot” by pushing rates higher than the level expected in a healthy economy. In September, Fed officials estimated that so-called neutral rate to be 2.8 percent.

The comments mark Rosengren, who does not vote on policy this year, as slightly more hawkish than most of his colleagues.

The US central bank voted to hold interest rates steady at its last policy meeting in September.

Since then, Federal Reserve Chair Janet Yellen has repeatedly acknowledged rising uncertainty on the path of inflation, which has been retreating from the Fed’s 2 percent target rate for much of this year.

However, Yellen and some other key policymakers have also made plain they expect to continue gradually rising interest rates given the strength of the overall economy and continued tightening of the labor market.

Still, Rosengren’s view lags the faster rate-hike path signaled by many monetary policy rules, including one authored and championed by Stanford University professor John Taylor.

Monetary policy rules specify where interest rates should be given the level of inflation and the state of the economy, and central bankers often use them to guide their rate-setting.

When asked how he would feel if the next Fed Chair wanted to enshrine a rule that would suggest a faster pace of rate hikes into law, Rosengren didn’t seem concerned.

He said he would hope for the chair to be flexible and pragmatic enough to make adjustments if the rule wasn’t working particularly well.