MNI INTERVIEW: Fed On Pause Amid Two-Sided Risks - Rosengren

Federal Reserve officials are likely to keep interest rates on hold for now as they balance a cooling labor market against persistent high inflation set to be exacerbated by rising oil prices, former Boston Fed President Eric Rosengren told MNI.

The central bank should even consider introducing language into its policy statement that indicates an interest rate increase might be appropriate if inflation remains at above-target levels, he said. 

"This is the most unappetizing central bank problem, which is the likelihood that both the labor market weakens and that inflation goes up. And the problem is that it's quite unclear at this point how long the hostilities in the Persian Gulf are going to continue," said Rosengren in an interview. 

INFLATION VS LABOR SHOCK

Disruptions to oil from the conflict in the Persian Gulf are likely to continue a little bit longer than many people were hoping, he said. If oil prices continued to be anywhere close to USD90 per barrel, then inflation will be much closer to 3.25% to 3.5%, and "that obviously is a pretty high inflation rate," he said. 

Before the war in Iran, it looked like GDP was going to be reasonably strong in 2026, the labor market would hold up, but core PCE inflation was going to continue to be sticky around 3%, Rosengren said. "In the absence of the shock, I would probably have thought that the committee was on hold, at least until the chair is put in place. But a lot depends on how quickly the war ends and how big the spillovers become."

The former Boston Fed chief noted potential impacts on the labor market. "Big oil shocks do have an influence on labor markets, and particularly if businesses start worrying that small businesses and low income and middle income consumers are going to be pulling back as their disposable income gets hit by the oil shock. That's how you start getting a more magnified effect in terms of the real economy. And it's too soon to tell that."

"Until we start seeing any spillover into the labor market, it's probably premature," Rosengren said. "I expect the FOMC to stay on hold. Unless there becomes a little bit more certainty during the war, it's a very difficult position for the Fed to make decisions." (See: MNI INTERVIEW: Fed Pause Reinforced By Iran Shock - Fuhrer) 

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