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Boston Fed President Eric Rosengren speaks with Yahoo Finance [Transcript]

Brian Cheung

Eric Rosengren, president of the Boston Fed, joined Yahoo Finance for a pre-taped interview on Oct. 5 at the “A House Divided: Geographic Disparities in Twenty-First Century America” conference. Rosengren discussed the Fed's interest rate policy, divisions among members of the FOMC, and his expectations for the U.S. economy.

Below is a transcript of his appearance:

BRIAN CHEUNG: Well, we are here at the Boston Fed with Boston Fed President Eric Rosengren. Thank you so much for joining us today.

ERIC ROSENGREN: Nice to be here.

BRIAN CHEUNG: So let's get started just with the conference. The past day and a half, we've been talking about the theme, which is a house divided, economic geographical base disparities in certain regions. Wondering in terms of, as a policymaker, on the monitory policy side of things, how do you think Fed policy can address what's been seen as a divide in the quality of whether or not everyone's recovered from this economic recovery over the past 10 years?

ERIC ROSENGREN: So the typical monetary policy tool, which is changing interest rates, can't be targeted to specific parts of the country. So in terms of just general monetary policy, we probably can't. But in terms of we do have a community development group that focuses on those parts of, for example, in Boston, the New England region, that's not performing nearly as well. So we are able to do that. And we also do a lot of research, which can be used by branches of government that can do more targeted work, including at the state level, but also at the federal level.

BRIAN CHEUNG: Now it was mentioned, even just in the last panel that just wrapped up — Larry Summers talking about the idea that there may be a moral hazard with Fed policy because raising wages in San Francisco might have a more aggregate impact than in West Virginia, say. So is there a way that the Federal Reserve can make sure that the impact of its policies — I mean, given what you just said, it's kind of difficult to do that — but make sure that the aspects of those policies are actually being transmitted across the country equally?

ERIC ROSENGREN: So we change interest rates. And those interest rates are national interest rates. We don't charge a different interest rate in San Francisco than West Virginia. So in terms of the distributional elements, certain parts of the country are affected differently by higher interest rates. So if we raised interest rates, something like autos is not going to do nearly as well. So there are distributional effects of what we do.

But our job, really, is to get it right for inflation and unemployment. And we have to leave the fiscal policy to get the distributional part of the equation.

BRIAN CHEUNG: Right. Now at the Boston Fed, you do have some programs that you can do to — I mean, especially since you are in contact with a lot of the people in the district — programs to address maybe some small programs with grants. Can you explain a little bit more about that?

ERIC ROSENGREN: Sure. We have a Working Cities competition that started in Massachusetts, now being applied in Rhode Island and Connecticut. The idea there is that one of the ways we can get communities to have a better outcome is that they work together in a collaborative way. And not all communities do that well. So it's the government working with business leaders, working with the nonprofit sector. The funding comes from actually national foundations as well as states and large businesses. And it's been pretty effective at getting some of these communities to be starting to tell a better story.

BRIAN CHEUNG: So let's shift back to the national picture. I want to get your economic outlook given the jobs data that we got yesterday — lowest unemployment rate in over 50 years; average job gains have been above 170,000 over the past 12 months; and wage growth, however, it ticked down to 2.9% — so a little bit of a mixed report. What's your outlook given that? And does that mean that Fed policy has been effective over the past 12 years where the tightness of the labor market is right now?

ERIC ROSENGREN: Well, the labor market is definitely tight — so 3.5% on the unemployment rate's quite low. I think the payroll employment was a little bit weaker than we were hoping. But as we get to very tight labor markets, you can't expect necessarily that the payroll employment is going to continue to grow nearly as fast. So in an economy where we already have a pretty tight labor market, you're starting to see GDP grow around 2% or a little bit less.

That's an environment where we're going to expect slower payroll growth. And that's exactly what we're seeing. So I think a lot of the debate is whether the slower payroll growth is a natural outcome from the fact that we're getting down to very tight labor markets. Or is it reflective of possibly an economy that's going to get a good bit weaker? So there are certain elements of the economy that are definitely worrisome. The manufacturing sector, the export sector have definitely not been doing as well. That's a result of the trade and the global slowdown.

But other areas have been holding up pretty well. And I would highlight consumption in that the consumer has been one of the reasons why, despite very weak investment and weak exports, we nonetheless have an economy that's been growing around 2%.

BRIAN CHEUNG: So given what you just said about how you might expect employment gains to temper a little bit, would you say that your expectation is for employment numbers for the rest of the year to maybe be at lower levels than, say, the hot for six months that we saw? And secondly, does that mean that you have expectations for GDP growth to then also temper?

ERIC ROSENGREN: So my own expectation for GDP growth's around 1.7% for the second half of this year. So that's roughly what we think potential is. That would be consistent with the unemployment rate staying about where it is right now and maybe inflation picking up a little bit more from where it is. But it's already below our target. So core PCE is at 1.8 — so I would expect over time we're going to get to a 2% inflation rate.

But it's actually a pretty good outcome in a world — when you think about what the Fed's supposed to be focused on, we're supposed to be focused on maximum employment. We have an unemployment rate of 3.5. We're focused on getting a 2% inflation rate. That core PCE is 1.8. We're pretty close to where we want to be. That is an environment where I would expect the payroll employment to actually gradually be a little bit slower, but consistent with staying where we are.

BRIAN CHEUNG: So with that in view, you also mentioned the manufacturing numbers not being so great on the negative maybe side of the economy. So would you not support another rate cut if there were to be one on the table for an October meeting in a few weeks, given what we've seen especially this week with services and also manufacturing numbers?

ERIC ROSENGREN: So I'm not going to precommit to — we still have some more data to get before we get to the meeting. So I think this is a period where we should really get the data right up to the meeting and then make a decision based on what we're seeing at that time. So a lot of it depends on, do we continue to see consumption being reasonably strong. Are reasons to believe it should be strong?

So personal income has been growing pretty quickly. Stock market's still pretty high, housing prices are still going up, labor markets are pretty tight, initial claims for people unemployed is still very low. Those are all conditions that you would expect actually pretty strong consumption. The real question is whether the consumers start getting more concerned about some of the headlines they've been seeing related to manufacturing and exports. We haven't seen that to a great degree to this point.

But if that were to happen, then I'd be more concerned. If that doesn't happen, then I'm more confident we'll be growing around that 1.7%, in which case there's not nearly as much of a need to do something.

BRIAN CHEUNG: So on that point, we need to see some deterioration in the consumer facing data. Now is there a concern that maybe that's too late? I mean, that seems to be the dividing schools of thought right now, between those who do and don't support rate cuts right now —whether or not you want to preemptively cut. So would it be too late if you wait until the consumer data starts to go sour before you make further accommodation?

ERIC ROSENGREN: So we've already eased twice. So right now, where our federal funds rate is around 1.9%. That's the short term rate that the Fed targets. We think that the federal funds rate in the longer run is going to be closer to 2 and 1/2. So we already have pretty accommodative policy. And it takes a little while for monetary policy to have an impact on the economy. So one of the reasons to sit back and wait and watch is to see whether we have sufficient amount of accommodation now or not. And so I think we're going to have to continue to watch the data right up to the meetings and then make decisions at the meetings.

BRIAN CHEUNG: So watching the data, it seems like people are looking at the data little bit differently. In the last FOMC on the dot plots, there were five members who appeared to not have opposed, or rather who appeared to have opposed the rate cut then, and then seven members who see one more rate cut maybe by the end of the year. With a divide that large on the FOMC-- and you've been at the Fed for some time-- how difficult is it to make sure that you're, not only agreeing on what the policy should be, but also communicating that in a way that the public and the markets can understand?

ERIC ROSENGREN: So we certainly should be able to communicate what our policy is. But we also shouldn't communicate more certainty than there is. And I think it actually is important to have dissenting views. And I dissented at the last meeting. So I obviously think it's important sometimes to dissent. Nobody complains about a Supreme Court Justice who has a dissenting opinion.

I actually think it's an obligation of everybody who sits at the FOMC that, if they disagree with the policy, they should state why and explain why. And you may win, you may lose. But the important thing is that all the issues get on the table. And as a group, we have to come to a conclusion. But I think everybody is very respectful of different viewpoints, and I think that's an important component of getting the right monetary policy.

BRIAN CHEUNG: I mean, how fierce is that debate, though? I mean, if we had three Reserve Bank presidents dissenting on a decision — and it seems like maybe the governor votes are more powerful in a way. I mean, that's just the optics of it, perhaps. I mean, is there a concern that maybe too many dissents, even if it's still a minority, does represent maybe a bit of a fractured viewpoint on what the actual underlying data is?

ERIC ROSENGREN: I think the important point is that everybody comes together in the end, but all the views are expressed and expressed as forcefully as people think is appropriate. I think that does happen. So we sometimes have contentious meetings. Sometimes they're not so contentious.

Turning points in the economy are times where people are going to disagree. And so the incoming data up to now haven't been all that bad. Really the debate is about some of these risks. Do these risks posed a likely outcome or do these risks pose something that's a risk but probably not going to happen? And it's easy enough to disagree on those, and that's the kind of debate that you have to have.

BRIAN CHEUNG: So one risk that you flagged in your recent dissent was a WeWork kind of office sharing structure where there's short term leases and then these special purpose entity structures that might actually present exposure to commercial real estate. That's something I hadn't heard before. You flagged leverage lending before, but CRE was kind of a new one. Why is that a concern for you? And is that something that contacts specifically in Boston have raised as, hey, this could be a real bad situation.

ERIC ROSENGREN: So it's not specific just a Boston. Shared office space occurs in many major cities around the country. It certainly happens in Boston. So there's a lot of shared office space in Boston. But it's not Boston specific. I think the challenge is that these kind of models rely on long term leases but then provide space to people in a shorter term basis.

That's kind of the financial stability issues that we've had at other times where we have a mismatch between assets and liabilities. And you worry about in the next recession the types of people that would not renew their lease would be some of those same people that are in shared office space that are on one year or shorter time horizons. And as a result, a lot of that space will become vacant all at the same time.

So normally, if you're renting out a building, you have different tenants. It's staggered. It doesn't all happen at the same time. But if everybody's in a shared office space, you actually have it highly correlated — that's a problem.

BRIAN CHEUNG: And lastly, there's been a lot of headlines going on right now. You mentioned that early in the interview — curve inverts for the first time since 2007, New York Fed moves to contain repo markets for the first time since '08, ISM manufacturing the lowest since 2009, all years that people don't want to hear. So what is your message to contacts in your district in terms of these worries about a recession? Is it really eminent? Is it an issue? Should people be preparing? Or is the US economy still strong and that it's all right for right now?

ERIC ROSENGREN: So my modal forecast is for a reasonably strong economy, that we're actually going to see growth around potential, that we're going to continue to see tight labor markets. Frequently when I talk to people in the New England area, they're talking about the shortage of labor and how hard it is to get people. If they want to expand, how do they get people that can do the jobs that they want? So it's surprising that I actually don't hear from many of my contacts in this district as much about the concerns. I actually hear more concerns about the fact that it's so hard to get labor. That's very consistent with a very tight labor market.

Now it's not that people aren't being affected by the tariffs and the trade concerns. We may not be as affected as some other parts of the country. So that may account for some of the difference. But my overall expectation is that the economy grows strong enough, we don't have a recession, and that labor markets remain untouched.

BRIAN CHEUNG: So the concern isn't necessarily recession induced, but more trade induced for kind of--

ERIC ROSENGREN: So the trade definitely affects certain sectors of the economy. It certainly affects manufacturing to the extent that the price of your manufactured good goes up in the country that you're trying to sell to and that also affects farmers who are actually being affected by the retaliation. We don't have a lot of agriculture here. And our manufacturing is not disproportionate in New England. So as a result, it's probably not as big an issue in this district.

BRIAN CHEUNG: Well, a great conversation — Boston Fed President Eric Rosengren, thank you so much for sitting down with me.

ERIC ROSENGREN: Yeah, thank you as well.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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