Rosengren Says QE3 Will Prevent Labor Market ‘Scarring’

Federal Reserve Bank of Boston President Eric Rosengren said the central bank’s third round of quantitative easing will bolster the housing market and economy while helping to prevent lasting damage to the labor market.

“It is important to generate faster growth to avoid what some call labor market ‘scarring’ -- where long-duration unemployment becomes ingrained into our labor market,” Rosengren said today, according to the text of a speech to be delivered in Quincy, Massachusetts.

Rosengren’s comments contrast with those of Federal Reserve Bank of Dallas President Richard Fisher, who said yesterday that the bond purchases will probably fail to create jobs while risking higher inflation. Neither is a voting member this year of the Federal Open Market Committee, which last week voted 11-1 to buy $40 billion a month of mortgage-backed securities.

Policy makers led by Chairman Ben S. Bernanke are seeking to boost growth and lower a jobless rate stuck above 8 percent since February 2009. The FOMC said in its Sept. 13 statement that economic conditions would likely warrant holding the Fed’s target interest rates near zero through at least mid-2015 and that monetary stimulus will remain appropriate for a “considerable time” after growth strengthens.

Stocks fell today after a report showing that more Americans than forecast filed claims for unemployment benefits added to concerns that the global economy is cooling. The Standard & Poor’s 500 Index declined 0.6 percent to 1,452.66 at 10:06 a.m. in New York.

Outdated Skills

“Long periods of unemployment frequently deplete the savings of the unemployed, make re-employment harder” Rosengren said, and “may lead to skills becoming less than current.”

Rosengren said that a “very challenging economic climate confronts us all” and that monetary policy is not “a panacea.” He added that appropriate fiscal policies in the U.S. and a pickup in global growth could “both provide significant positive effects, and shorten the time needed for unconventional monetary-policy actions like those we have announced.”

The decision to purchase mortgage bonds will place downward pressure on rates for home loans and help improve property sales and prices, Rosengren said.

The housing market has already been improving, a trend confirmed by reports yesterday showing that sales of previously owned homes and work on single-family projects climbed in August to the highest levels in two years.

Home Sales

Purchases of existing houses increased 7.8 percent to a 4.82 million annual rate in August, the most since May 2010, figures from the National Association of Realtors showed yesterday in Washington. Commerce Department data showed builders began work on the most one-family homes since April 2010.

Confidence among homebuilders climbed to the highest level in more than six years, according to a Sept. 18 report of the National Association of Home Builders/Wells Fargo builder sentiment index.

Rosengren joined Chicago Fed President Charles Evans and the New York Fed’s William C. Dudley in defending the third round of quantitative easing.

Evans said in a speech in Ann Arbor, Michigan on Sept. 18 that the Fed’s actions will help strengthen a pace of growth that has been “disappointing” and help counteract “greater downside risks posed by the slowdown in global economic growth, the economic turmoil in Europe and the fast-approaching U.S. fiscal cliff.” If Congress doesn’t act, more than $600 billion in automatic tax increases and spending cuts will take effect starting in January.

‘Unacceptably Slow’

Dudley said Sept. 18 that without further action from the Fed, growth would remain “unacceptably slow.” Dudley also said monetary policy isn’t a “panacea” although a “nudge in the right direction will move us closer to a self-reinforcing cycle of more hiring, more spending, more growth, and more investment.”

Jeffrey Lacker of the Richmond Fed voted against the decision to purchase more bonds, extending his string of dissents from every FOMC decision this year. He said more stimulus “runs the risk of raising inflation.”

Rosengren said his own economic forecasts assume that Congress will come to “some sort of agreement” to prevent the full range of tax increases and spending cuts scheduled to take effect at the end of the year.

‘Swamped by Events’

He said he doesn’t worry that QE3 will be ineffective and is more concerned that “we would be swamped by events out of our control -- the fiscal cliff, Europe, China other things going on in the world.” He added he does not forecast a “severe problem” coming from Europe or China.

Fed Presidents rotate voting on monetary policy, with Rosengren, 55, voting next year. He has led the Boston Fed since 2007. Rosengren’s remarks were titled “Acting to Avoid a ‘Great Stagnation.’”

“I am very pleased that monetary-policy makers in the U.S. are proving willing to take difficult actions like these rather than accept the possibility of a long, slow recovery turning into a stagnation that someday earns the dubious title of ‘Great,’” he said.

To contact the reporter on this story: Joshua Zumbrun in Quincy, Massachusetts at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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