Monday , March 12, 2018 - 11:20 AM
(c) 2018, The Washington Post.
One of the United States’ top economists - Boston Federal Reserve President Eric Rosengren - says President Trump’s steel and aluminum tariffs are “not going to have a big impact” on the economy. He doesn’t believe the tariffs will trigger a global trade war.
Rosengren sees a rosy 2018 for the U.S. economy with more jobs, more spending and more business investment. Everything is going well enough that he’s pushing for the Federal Reserve to raise interest rates more than three times this year.
“We’re in an environment where we’re right at our target if things come out the way I’m expecting in terms of inflation. And we’re pretty low on the unemployment rate,” Rosengren said in an interview with The Washington Post on Friday. “That is good news.”
He credits the GOP tax cuts for boosting growth this year, but he does not think they are having any impact on wages. The small uptick in pay that has happened so far this year is almost all attributable to a tight labor market, he says. Companies are struggling to find enough workers and are having to pay more to attract - and keep - good talent.
“Is the tax cut the primary driver for changes in wages? No. It’s the fact that we have a strong economy that’s generating strong wages,” he said.
Below is a Q&A with Rosengren, edited for length, during which he discussed Trump’s tariffs, tax cuts, jobs, inflation, new Fed Chair Jerome H. Powell, and the push for more diversity and an end to the 2 percent inflation target at the Fed. The next Fed meeting is March 20 and 21. Wall Street expects that the Fed will raise interest rates at the meeting. Rosengren is not a voting member this year, but he will be in 2019.
- On tariffs:
The Washington Post: How are you assessing President Trump’s tariff announcements and their effect on the economy? I know it’s early days.
Rosengren: I’d say it’s very early days. The implementation strategy is quite unclear at this point. It’s not clear to me exactly how the exclusions work. Obviously, Mexico and Canada got excluded, but it looks like we’ll have to wait and see how the policy is actually implemented. Currently when I’m doing my forecast, I’m assuming it’s not going to have a big effect because I’m assuming it’s not in anybody’s interest to have a trade war.
Obviously, if we had a serious trade war, that would start changing the forecast, so I don’t think it would be good for the global economy, and that couldn’t be good for the U.S. economy. But my expectation is that we’ll not go in that direction and that common sense will prevail.
- On the possibility of four or more interest rate hikes from the Fed in 2018:
TWP: You’ve implied there might be more than three rate hikes this year. Why?
Rosengren: The reason I focus on consumption is that it is two-thirds of the economy. It’s very hard to have a strong economy without strong consumption. And so it’s a little bit surprising that the first-quarter data that we’ve had to date has been a little bit weak. But fiscal spending and the tax cut is an environment where we have a lot of fiscal stimulus, and monetary policy is still accommodative. The wealth effects are important, so the stock market - other than the last month - has done quite well. Housing prices have continued to go up. So that’s an environment where I’m expecting consumption to be strong, and I would expect that investment would be strong, as well.
Investment has been a bit on the weak side, including in this first quarter. Certainly, uncertainty in the stock price, but also in trade and other types of issues are the kinds of things that can be disruptive to what otherwise should have been a very good story for investment, which is relatively strong GDP, wages starting to grow and some tax incentives to invest. So all those should be components that make it an attractive environment to have more business fixed investment in the forecast. Most forecasts have [higher business investment] as an attribute, but obviously we’ve got a lot more uncertainty from other factors and we may not see as robust of an investment as we otherwise would have seen.
- On the impact of Trump’s tax cuts:
TWP: Is that investment pickup happening because of the tax cuts and changes to the tax code?
Rosengren: So I’m an economist, and incentives matter. I don’t think it’s the driving force in investment, to be quite honest, but on the margin, it makes a difference. When you have accelerated depreciation, it’s much easier to get a rate of return on the investment. That should make some difference, but I think what makes more of a difference is a strong U.S. and global economy. As long as people are confident that the economy is going to continue to grow - if you look at the kinds of models of investment - it’s usually driven more by strength of the economy than it is by the pricing of investment goods, including the interest rate that you’d have to pay in order to borrow. And for a lot of companies, they can finance it just through the earnings. So one reason I think an interest rate doesn’t come in so strongly in an investment equation is because it’s so dominated by strength in the economy.
- On the Fed avoiding boom and bust:
TWP: So as of today, do you see four rate hikes this year?
Rosengren: The only time that we really provide - you know, the dot plot that we do quarterly and the last one is for December, the next one will be in March. In December, I thought it was probably appropriate to do more than three increases. That’s based on the fact that I was seeing wages and prices going up. I thought that the slowdown in inflation over the course of starting last spring and going through the summer was primarily driven by relative price changes, not a broader kind of context that is what inflation is actually trying to measure. So far, it looks like the data is actually coming in quite consistent with that. And I would say the private sector forecasts also seem to be raising their prospects for what inflation is going to be over the course of this year.
If you look at three-month [and] six-month [personal consumption expenditure] inflation, it’s over 2 percent right now. Some of that is driven by high oil prices. Take the oil prices out, and we still come out very close to 2 percent. My expectation is over the rest of this year, we’ll be at 2 percent. So we’re in an environment where we’re right at our target if things come out the way I’m expecting in terms of inflation. And we’re pretty low on the unemployment rate. My guess is that [the February jobs report] will be a strong enough report that it’ll be consistent with what forecasters are expecting, which is that the unemployment rate will continue to drift drown. That is good news. But I don’t want to boom and bust, and that’s a little bit what I’m concerned about is that maximum sustainable unemployment is what I’d be looking for, and I don’t want something that’s not sustainable. That would potentially cause a reaction for monetary policy. And so I think we have to be mindful that we want the economy to grow for as long as possible because that bust phase can be very, very expensive to some of the people that are getting jobsnowbut would also be some of the people that would probably lose their jobs first.
So we want to make sure that we don’t induce a cycle. What we want to do is really have the sustained employment growth that we’ve been experiencing. And we have the luxury to do that because we don’t have a big inflation problem now. I think we’re going to have inflation around 2 percent, but that’s where we want to be.
- On tax cuts not driving wages higher:
TWP: On wages, do you see the tax code changes as being the significant factor that will drive up wages this year?
Rosengren: No. It’s tight labor markets. If you look at people moving, I mean the process is common-sensical. If you start getting job offers at higher salaries and you leave, not only do you get a higher salary, but they realize they have to replace you with somebody probably at a higher salary because the market’s telling them that they don’t have the right wage.
So as you start seeing more people willing to move from job to job and go for higher wages, it starts increasing wages across the economy. So I think it’s driven by tight labor markets and the expectation that it will continue to be tight given accommodative monetary and fiscal policy.
I think that’s the driver for the wage growth, and it was already occurring well before people thought that any changes were occurring in the taxes. And so it’s not that taxes have no effect, because one reason we think the economy’s going to be strong over the course of this year is the tax cuts. But is the tax cut the primary driver for changes in wages? No. It’s the fact that we have a strong economy that’s generating strong wages.
- On whether there’s enough diversity at the Fed:
TWP: One of the things that a number of the Fed chairs have been asked when they go in front of Congress is about diversity at the Fed. Has diversity improved at the Boston Fed since you became president in 2007?
Rosengren: One look at our board of directors: We have two African Americans, one Indian American and two women. So I think our own board is diverse along a lot of dimensions. It’s diverse by gender. It’s diverse by race. It’s diverse by industry makeup, and it’s diverse by geography. So I think the goal is to have a wide variety of views expressed, and I think, for example, my board does reflect that. So I think we should think broadly about what we mean by diversity, and that’s really the diversity of views that you want to be promoting. So I wouldn’t look at it as just one element of that, but I think the Fed has come a long way to take that into consideration and making sure that by structure we were intended to be diverse by having lots of different voices, and that includes inviting a lot of people to the table that aren’t always invited. I think most of [Federal] Reserve banks are doing a much better job [of that] than they were doing 10 or 15 years ago.
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