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The Federal Reserve is right to hold off on raising U.S. interest rates for now so as not to risk a further and potentially economically costly drop in already low inflation, a top U.S. central banker said on Thursday.
The Fed has kept rates near zero since December 2008, and though most Fed officials now believe raising borrowing costs sometime this year will be appropriate, they also have said they will be "patient" in beginning to tighten monetary policy. While unemployment has dropped to 5.6 percent from its recession-era peak of 10 percent, inflation is running at around 1.3 percent, well below the Fed's 2-percent goal.
Central bankers worry about persistently low inflation not only because it can be a sign of slack in the labor market, but also because it can undercut inflation expectations, acting as a further drag on growth.
"Given how low total and core inflation have fallen in most developed countries, a policy of patience in the United States continues to be appropriate," Boston Fed President Eric Rosengren said in remarks prepared for delivery in Frankfurt, Germany. "This is particularly true given the inherent asymmetry that we face at the zero lower bound—meaning, while we have all kinds of room to respond to an unexpectedly favorable shock, we remain quite limited in our ability to respond to negative shocks."
Rosengren was speaking at a conference sponsored by The Peterson Institute for International Economics and Moody's Investors Service's 8th Joint Event on Sovereign Risk and Macroeconomics.
Rosengren, who does not vote on Fed policy this year, did not address his preferred timing for raising U.S. interest rates in his prepared remarks, which were largely focused on making the case that the Fed's three rounds of quantitative easing effectively helped boost the U.S. economy.
The European Central Bank recently said it would launch its own bond-buying program to combat low inflation and sluggish economic growth, a move which Rosengren implicitly applauded.
"A significant undershooting of the inflation target should be treated with the same policy urgency as a significant overshooting of the inflation target," Rosengren said. The current drop in oil prices "has served to accentuate a potential monetary policy pitfall, in this case, the failure to quickly and vigorously address a significant undershooting of inflation targets, potentially leaving economies stagnant at the zero lower bound," he added.
In the U.S., he said, there is "insufficient evidence" that inflation is rising back to the 2 percent goal, and little evidence that wage growth is returning to pre-crisis levels.