Rosengren to markets: You have it all wrong on rate hikes

Eric Rosengren
Wendy Maeda | The Boston Globe | Getty Images
Eric Rosengren

Futures markets are wrong, and the Federal Reserve likely should hike rates sooner than they imply, Boston Federal Reserve President Eric Rosengren said Monday.

In prepared remarks for a speech in Boston, Rosengren — a Federal Open Market Committee voter and historically one of its dovish members — also said markets are too slow in pricing in rate hikes, and that their path of hikes is too low.

"A weak forecast doesn't seem to explain the path expected for the funds rate," he said in prepared remarks. "As I see it, the risks seem to be abating that problems from abroad would be severe enough to disrupt the U.S. recovery. Financial-market volatility has fallen, and most economic forecasts do not reflect expected large spillovers from continued headwinds from abroad."

The U.S. "has weathered foreign shocks quite well," Rosengren said, adding that the risks from abroad are easing overall. Those comments potentially stand in contrast to remarks from Federal Reserve Chair Janet Yellen, who last week pointed to weakened international conditions in explaining her cautious outlook.

Rosengren, who is historically considered to be about as dovish as Yellen, said he expects a strong economy and full employment. He also said he expects inflation will rise gradually.

On Friday afternoon, markets were only pricing a 5 percent chance of a rate hike in April, according to CME Group data. As of Friday, the first month with a better-than-50-percent chance of a rate hike was September, according to CME Group.

"With financial market volatility subsiding since earlier this year, it is to me surprising that the expected path of monetary policy embedded in futures markets is so low," Rosengren said Monday.

It was only last Tuesday that Yellen sounded a dovish note in a speech, acknowledging that economic and financial conditions are in some respects less favorable now than in December.

In that speech, Yellen cited global concerns as one of the reasons behind her tepid economic outlook. And responding to a question after her remarks, Yellen said the "major thing that's changed" between December and March affecting the Fed's baseline outlook is "a slightly weaker projected pace of global growth."

A dovish Fed left interest rates unchanged in March. In its statement, the FOMC noted that "global economic and financial developments continue to pose risks" to U.S. economic growth, and that inflation was "expected to remain low in the near term."