NEW YORK CITY—After increasing the federal funds rate just twice in the past decade, the Federal Reserve may end up hiking short-term interest rates this year more frequently than the current forecast, the head of the Boston Federal Reserve said Wednesday. Boston Fed president Eric Rosengren made his comments in a speech to the New York Association for Business Economics here.

The economy has continued to improve,” Rosengren said Wednesday. “Most forecasters are predicting above-potential growth and a gradual tightening in labor markets. In my view, such a path would justify a continued, gradual removal of monetary policy accommodation at least as quickly” as suggested by the Fed's current Summary of Economic Projections, “and possibly even a bit more rapidly than that forecast.” The SEP predicted three increases over each of the next three years as inflation edges up to a target and GDP growth remains in a range of 2%.

The path of interest rates in the SEP median forecast may well be reasonable, Rosengren said, “if the US economy averages about 2% growth over the next two years. However, if real GDP grows faster than that—as I expect it may—it is reasonable to expect additional labor market tightening, gradual increases in inflation and, potentially, emerging imbalances in some asset markets. Should this forecast for somewhat faster growth than projected in the SEP materialize, my own view is that the US economy may need somewhat less monetary policy accommodation,” i.e. a faster pace on increases in the federal funds rate.

Although Rosengren's forecast assumes a continuation of the economic growth the US has seen over the past several years, “it is important to note that the 'starting point' is now quite different than it was a few years ago.” He noted that the current 4.8% rate of unemployment is the same as the median forecast for unemployment in the long run as contained in the latest SEP, and only 0.1% above his own estimate of full employment.

“This would suggest that there is limited room for further tightening in labor markets before one might see more inflationary pressures,” he said Wednesday. “Also, inflation is now close enough to the Federal Reserve's 2% target that it is possible that we will reach the target as soon as the end of this year.”

Rosengren added, though, that “inflation is not the only consequence of reaching or exceeding full employment. Another possibility is that imbalances will manifest themselves in asset prices, such as the price of commercial real estate.”

Rosengren's observation about CRE pricing continues a trend noted by the CRE Finance Council in its “The Week in Washington” e-newsletter, to wit, that “regulators seemed to have set their sights on the sector as an area of potential concern.” As GlobeSt.com's Erika Morphy reported last week, the Fed's latest Senior Loan Officer Opinion Survey on Banking Lending Practices found that lending standards on commercial properties tightened in the fourth quarter of 2016, although the Office of the Comptroller of the Currency came to a very different conclusion.

In CREFC's view, the Fed survey provided “no smoking guns” and no surprises. “In fact, we view the data as supportive of the notion that—while the current cycle is indeed 'mature'—reports of its demise are greatly exaggerated. The data show that lending on construction and multifamily is growing more conservative, and that loan volumes to these sectors are adjusting downward, reflecting the heightened caution both borrowers and lenders are exhibiting at this stage in the cycle.”

Instant Insights /

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