HARTFORD, Conn. Jan 13 (Reuters) - U.S. Federal Reserve policymakers are forecasting an “almost ideal” outcome in 2020 where the U.S. labor market will stay strong and inflation will approach the central bank’s 2% target, but officials should remember to consider potential risks, Boston Federal Reserve Bank President Eric Rosengren said on Monday.
Among those risks is the threat that the tight labor market could lead to a sudden pickup in inflation, Rosengren said, according to prepared remarks to be delivered to the Connecticut Business & Industry Association in Hartford, Connecticut.
“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,” Rosengren said. “So we want to be alert to any potential risks emerging.”
Rosengren, who voted against the three rate cuts passed by the Fed last year, said interest rates are now accommodative and cautioned that officials need to watch out for the risk that prices and the labor market could grow faster than expected.
He also repeated his concern that low rates could encourage consumers and businesses to take on more risk and inflate the value of real estate and other assets. Both commercial and residential real-estate values are “sensitive” to rates and valuations could grow when rates are low, Rosengren said.
Fed officials voted unanimously to keep interest rates unchanged at the December policy meeting and policymakers sent a strong signal that rates are likely to stay at current levels for the time being.
Policymakers expect the unemployment rate to stay below 4% in the range seen last year, Rosengren said. But with interest rates also low, there is a chance that the labor market could reach “unsustainable levels,” causing wages and inflation to grow more quickly than expected, Rosengren said.
He also noted that, so far, inflation is more muted than expected given today’s low levels of unemployment - a puzzling outcome some economists attribute to the weakening of unions and shifts in the types of jobs available.
“Admittedly, most forecasters do not expect this in their modal (most likely outcome) forecast,” he said. “But more rapid than expected inflation remains a risk of running the economy with accommodative monetary policy and tight labor markets.” (Reporting by Jonnelle Marte; Editing by Andrea Ricci)