Boston Fed President Eric Rosengren joins Yahoo Finance's Brian Cheung to discuss the latest on economic recovery.

Video Transcript

BRIAN CHEUNG: Welcome back to Yahoo Finance. I'm Brian Cheung, here with a conversation with Boston Fed president Eric Rosengren. And President Rosengren, we were talking about monetary policy. I want to kind of just switch gears real quick to another newsy item that people have been watching, the Biden agreement for an infrastructure package that could total $1.2 trillion. I guess from your vantage point, what might be the impact of that, especially given the concerns about maybe an overheating economy?

ERIC ROSENGREN: Well, first of all, we don't actually have a signed bill yet, so we'll see if the actual bill gets signed and what it's paired with. But fiscal policy is highly stimulative, as you've highlighted. That is one of the reasons why we're expecting such strong growth. So it's a bit unusual to have a coordinated very low period of interest rates at the same time that we're getting so much fiscal stimulus.

That is one of the reasons we're expecting to get back towards full employment at the end of this year, beginning of next year. And so I'm very supportive of the fiscal policy we're doing. I do think, at some point, we're going to have to be thinking about how to financing that, certainly when we get back to full employment and if inflation is around 2%. Just as monetary policy has to normalize, so does fiscal policy.

BRIAN CHEUNG: Now, I want to switch gears to financial stability. You just had a pretty in-depth conversation at the OMFIF about a number of stability risks that you're watching, but people forget that the Federal Reserve is not only watching the proximity to maximum employment, and also price stability, but also making sure that there's no bubbles popping up in the financial system. And you did call out home prices as one possible area. Wondering if you could elaborate a little bit more about the rising home prices that you're seeing in the Boston area where you sit, and whether or not that could present some sort of financial stability risk.

ERIC ROSENGREN: Yeah, my concern about housing prices is not just because prices are going up in the Boston area. It's really because prices are going up across the country. And I think you're also seeing price increases that are going up rapidly in less traditional places. More rural areas of Maine, western Massachusetts are places where real estate prices normally are not going up rapidly. So it's not just in the cities like Boston that we're seeing that. We're seeing it in the outlying areas, as well.

Now, that's not to say that I think that it's an immediate problem. But in that talk, I did have a chart that highlighted, across a wide variety of markets, housing prices have been going up in many of those markets. It's already higher than it was in the 2005 to 2007 period. And I would highlight that, over the last three or four months, at least in some markets, the steepness of how much prices have been going up is quite similar to what we were seeing in the 2005 to 2007 period.

The reason I focus on housing prices and real estate prices generally is because it's a widely held asset and it's tended to result in financial stability problems in many of our worst recessions. So think about the financial crisis or the Great Depression in the United States. But if you look at financial stability problems around the world, they tend to be tied to real estate.

So I think it's an area that bears monitoring. It's not at the point where we should be panicked, it's not at a point where we should be overly concerned, but if this were to continue and if it was starting to get embedded in people's expectations for where prices would be going, that would start to become a more significant concern. The last thing we want to do is to try to get the full employment and then unintentionally cause a boom and bust in the housing sector that prevents us from getting to full employment or staying at full employment. So I think that is one of the many areas of financial stability that we have to keep our eyes on as we think about keeping interest rates low in order to meet our inflation and unemployment objectives.

BRIAN CHEUNG: Well, I guess a natural question might be, is the Fed's purchases of agency mortgage-backed securities-- it's buying about $40 billion a month as part of its quantitative easing program-- feeding into what you're seeing? And if so, does that make a case for maybe skewing away from mortgage-backed securities at some point when you do decide to start tapering that program?

ERIC ROSENGREN: So our criteria for tapering is substantial further progress. And the question is when we reach that view that we've attained substantial further progress. I think in inflation, we've made substantial further progress. Maybe we've overproduced right now. But on the labor market, I still think there is significant labor market slack.

But I do expect that it's going to subside over the course of this year. So I think it's quite likely that the substantial further progress criteria, at least in my own personal view, will likely be met prior to the beginning of next year. And a lot depends on exactly what happens with the economy over the course of the summer and into the fall about when it would be appropriate to actually start the taper.

In terms of your direct question on MBS, I mean, we're buying both treasuries and MBS in order to keep long-term interest rates low. I do think that one of the areas that we should consider is that the tapering maybe should be in the same amounts for both the Treasury securities and the MBS. As you know, we're purchasing 120 billion overall, 80 billion of treasuries, 40 billion of MBS.

If we decrease the same amount of those two when we do start tapering, that would mean we'd stop the MBS program well before we stop the Treasury program. These are details, though, that the FOMC has not decided on, so these are just my own personal views. But I do think, right now, that the spread between MBS and treasuries is quite narrow, and I do think we have to pay attention to the housing sector. So I think that is one of many considerations that we should include as we think about the substantial further progress.

BRIAN CHEUNG: And then I want to shift lastly here to stablecoins. You were talking about Tether in your presentation, actually, just about an hour ago. It's been taking a lot of air out of some of these prime money market funds. But you pointed out that Tether and a lot of these other stablecoins are deep in things like commercial paper, and even corporate bonds, in some cases. But my question is that the Fed did step in during the midst of this pandemic to backstop the corporate debt market and commercial paper market, so I guess isn't the financial stability risk of those stablecoins like Tether only as big of a risk as the Fed will allow, given its historical role as a backstopper?

ERIC ROSENGREN: The reason I talked about Tether and stablecoins is, if you look at their portfolio, it basically looks like a portfolio of a prime money market fund, but maybe riskier. We actually had a stablecoin that ran into financial difficulties last week. Tether, as you highlighted, has a number of assets that, during the pandemic, the spread got quite wide on those assets. The Fed intervened in order to make sure that short-term credit markets continued to operate.

And the reason we should be a bit concerned about stablecoin is that it's growing very rapidly. So there's exponential growth in stablecoin, and the prime money market funds have been slowly going down as people have looked for a less risky way to hold their transactions accounts, and many of them have moved to government money market funds. But I do think we need to think more broadly about what could disrupt short-term credit markets over time, and certainly stablecoins are one element. I think there are other investment products, as well, that have the characteristic that, if we have a big shock in financial markets, people tend to move out of those areas quite quickly. And I think that's an area of financial stability we need to pay more attention to.

BRIAN CHEUNG: I mean, I guess as a follow-up, though, I guess my point being that, if the Fed is going to backstop those markets if they do experience stress, then wouldn't there not as big of a financial stability risk from those types of products?

ERIC ROSENGREN: So my own view is that we should be changing the regulatory environment so that we don't have to intervene in the markets every 10 years. And while we ran the NMLF and the AMLF to support short-term credit markets and the money market funds in the last two recessions out of the Boston Fed, I would hope that we would change the regulations so that the next time we have a crisis, we don't have to do it again.

And I guess the broader point is that it's not just money market funds that we have to be worried about. We have to be worried about things that destabilize short-term credit markets. That takes a more holistic approach to thinking about financial market regulation. I do worry that the stablecoin market that is currently pretty much unregulated, as it grows and becomes a more important sector of our economy, that we need to take seriously what happens if people run from these type of instruments very quickly. And just like the money market funds caused a bad disruption in credit markets, I think a future financial stability problem could be occurring if we don't start thinking carefully about what happens to things like stablecoins next time we have a bad market difficulty.

BRIAN CHEUNG: All right, well a lot to chew on there. But again, the Federal Reserve Bank of Boston president Eric Rosengren stopping by Yahoo Finance. And I want to point out, by the way, that we did not call each other to coordinate this outfit today. But thanks again for stopping by here on Yahoo Finance. For right now, we'll toss it back over to you, Kristin.

- All right, Brian, thanks so much for bringing us that interview.