By Michael S. Derby 

Federal Reserve Bank of Boston chief Eric Rosengren said Tuesday he sees no "clarion call" to change central bank interest rate policy right now, in comments that indicated sustained trade tariffs could accelerate a return to the Fed's 2% inflation target.

"I view current policy as slightly accommodative and likely to be consistent with inflation returning to the Fed's 2% inflation target over time," Mr. Rosengren said in a speech at the Economic Club of New York. He added that when it comes to price pressures moving back to desired levels, "this is likely to occur more rapidly if tariffs are imposed."

Mr. Rosengren holds a voting role on the rate-setting Federal Open Market Committee this year. His view that the central bank faces no imminent need to change short-term borrowing costs mirrors that of many of his colleagues.

With solid growth, a healthy labor market and low inflation, central bankers by and large see no reason to raise or lower a short-term target rate range that now stands at between 2.25% and 2.50%. Financial markets, however, reckon there's a good chance that the Fed may have to lower rates by year end, in large part due to the persistent weakness of inflation relative to the 2% target.

The Fed adopted its inflation target in 2012 and failed to achieve it in a sustainable fashion at any point. What's more, inflation pressures have weakened this year, as have expectations of future price rises. Key Fed officials like Chairman Jerome Powell and New York Fed leader John Williams have all said they believe the weakness of inflation is temporary and that inflation will rise back to desired levels over time.

In his speech, Mr. Rosengren was upbeat about the outlook, but he described the ongoing trade dispute between the U.S. and China are a negative for the outlook. He expects the trade disagreements to be resolved, but if they aren't, they could have an impact on the U.S. economy.

"The presence of a prominent downside risk -- more disruptive trade negotiations -- seems to me to be another important reason for policymaker patience until this source of uncertainty is more resolved," he said.

Contrary to President's Trump's repeated assertions that China is paying for the significant tariffs he has erected on their goods, Mr. Rosengren explained how that isn't true.

"U.S. tariffs are effectively taxes on imports, and our trading partners' tariffs are taxes they pay on our exports," Mr. Rosengren said. "Tariffs matter when it comes to inflation" and "tariffs will tend to raise prices on imported goods to the U.S."

How much of an impact tariffs have on the economy and on inflation depends on whether the tariffs are prolonged, and whether consumers can find domestically produced goods to substitute for the more expensive Chinese goods, Mr. Rosengren said. He didn't quantify how much inflationary upside might result from prolonged tariffs.

Mr. Rosengren told the audience that if sustained trade tariffs caused a persistent rise in inflation, it could draw a monetary-policy response.

Long-running tariffs could push up inflation and become a bigger factor for the job market, and the Fed wouldn't shrug this off, he said. "It's going to be really hard to distinguish [the tariff impact] particularly in tight labor market," so the Fed would have to focus on the headline number and proceed accordingly, Mr. Rosengren explained.

When it comes to the economy's performance so far, things are looking pretty good, Mr. Rosengren said.

"The broader U.S. economy seems to be displaying a sounder footing than it was at the beginning of this year," he said. "Both the consensus outlook and my own forecast suggest a modest step down from last year's pace but still imply enough momentum to push the unemployment rate down even further."

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

May 21, 2019 13:37 ET (17:37 GMT)

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