Recent turmoil in financial markets and slowing global growth are weighing on the US economy, highlighting the need for a gradual approach to raising interest rates, Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, said in a speech Tuesday evening.
Rosengren, speaking at Colby College in Maine, focused on a very low inflation rate that indicates the US economy is not yet running on all cylinders. The Fed’s preferred measure of inflation is at about 1.4 percent, well below the 2 percent the Fed sees as a sign of healthy economy.
“We have seen oil prices decline and global stock indices become more volatile, and more generally a lack of inflationary pressures and the presence of global headwinds that make future economic growth somewhat more uncertain, ’’ Rosengren said in his prepared remarks.
If inflation doesn’t move closer to the 2 percent target, Rosengren said, the Fed should be “unhurried’’ in its campaign to raise interest rates.
The central bank raised its benchmark interest rate by a quarter point in December, after holding it near zero since the end of 2008. Policy makers had hoped to move to more normal monetary policy this year by raising rates four more times.
But returning to a more normal monetary policy — where the Federal Reserve isn’t propping up the economy with low rates designed to spur spending and lending — is proving more difficult. Central banks in other countries, including most recently Japan, have even adopted negative interest rates, in which people pay banks to hold their deposits, as a way to spur lending, borrowing, and economic growth.
Concerned that the global slowdown will affect the United States, many economists now expect the Fed to raise interest rates only twice this year, starting in June.
The central bank considers both the unemployment rate and inflation in making policy decisions about whether to raise rates. While unemployment has fallen to 4.9 percent, inflation has been slower to pick up. Declines in energy costs, driven by both a glut in oil and slowing global demand, will likely continue to keep inflation down, Rosengren said.
The strong US dollar is also making imported goods cheaper and reducing inflation in the United States, he said.
Still, the US economy is showing some signs of resilience, even in the face of these headwinds, Rosengren said. Wages and salaries, for example, are slowly increasing, he said.
If the global weakness spreads to the United States, “I personally believe there would be little need to raise rates until the economy was growing closer to its potential,’’ he said.
Deirdre Fernandes can be reached at deirdre.fernandes@globe.com. Follow her on Twitter @fernandesglobe.
