By Ann Saphir
(Reuters) - The recent drop in U. S. unemployment could spark a surge in inflation that, given the Federal Reserve's current policy framework, could trigger interest-rate hikes that bring on a recession, Boston Federal Reserve President Eric Rosengren warned on Friday.
"I'm disagreeing with that framework," Rosengren said at the Global Interdependence Center in San Diego, referring to the Fed's "balanced" approach to achieving a 2-percent inflation target and full employment.
The Fed adopted this framework six years ago and has reaffirmed it each year since.
Rosengren's comments Friday put the sharpest point to date on the debate, suggesting that a strict 2-percent inflation target could force the Fed to slam the brakes on the economy with aggressive rate hikes if the unemployment rate, now at 4.1 percent, continues to sink. It is already below the level that many economists think can be sustained without putting upward pressure on inflation.
"My concern is if we get too far away from where we want to be on a sustainable unemployment rate, and we use this current framework, then we will get to a situation where we have to raise rates fast enough that we will actually find it very difficult to get back to full employment without causing a recession," Rosengren said.
Rosengren's solution, proposed publicly for the first time in detail in his Friday speech, differs from approaches preferred by some of his colleagues, including targeting an average rate of 2-percent inflation, or lifting the inflation target to 4 percent.
But common to all of the approaches is the view that the central bank needs better leverage against future recessions than the current approach affords.
"We are approaching a time when a comprehensive reconsideration of the monetary policy framework is likely warranted," Rosengren said.
(Reporting by Ann Saphir; editing by Diane Craft)