Despite the favorable environment, the Federal Reserve is in new territory and should watch out for possible risks to the outlook, Federal Reserve President Eric Rosengren said on Monday.
"Private forecasters and [Federal Open Market Committee] Participants expect good results for the economy in 2020 and beyond with low inflation and strong labor markets. However, as with any forecast, there are risk scenarios that are not as likely to be captured by the economy, ”Rosengren said in a speech to a group of companies in Hartford, Conn.
Currently, the Fed's interest rate policy is "accommodating" or pushing for faster growth, even though the unemployment rate has historically been low.
"Central bankers don't have much historical experience in this environment," said Rosengren.
Rosegren said he focuses on the risks of higher inflation and financial stability.
The president of the US Federal Reserve in Boston was a voter last year and rejected the three key rate cuts.
While higher inflation might be a good thing, "economists have no precise understanding of how inflation expectations are developing, and of course an overly hot economy could increase inflationary pressures," said Rosengren.
Rosengren disagreed with many analysts that there have been no wage increases recently. He said wages for non-supervisory workers rose.
While higher wages are "a good thing," he said, wage inflation that far exceeds the sum of productivity growth and inflation can lead to price pressure, particularly in the service sector.
This could translate into a slowdown in corporate earnings versus GDP, he said.
"To the extent that companies are unable or unwilling to bear the rising costs as wages respond to low unemployment, we can see the associated risk of inflation occurring," said Rosengren.
"At some point, we would expect wage increases to gradually hit prices because you can't lower your profit margins any further," he added.
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Rosengren reiterated that he remains concerned that the low interest rate environment is causing investors to take more risks in order to generate higher returns. He noted that this process led to tears in the property markets in 1990 and 2007, when prices plummeted.
The bonds held by investors were found to far exceed the value of the assets against which they had borrowed.
While there are also risks that could slow the economy down due to trade policy or global weakness, Rosengren saw the potential risks of inflation and financial stability as somewhat more worrying.
“If these two risks are contained relatively well, I think we are facing a pretty good year. The economy looks like we're gently landing with an inflation rate of almost 2% and fairly tight labor markets. " he said.
The stocks were higher early in the morning trading the S&P 500
SPX, + 0.45%
Index rises by 8.79 points and the Dow Jones Industrial Average
DJIA, + 0.21%
flirt again when it reaches its 29,000 milestone.