Rosengren Calls for QE3 Until Unemployment Falls to 7.25%
Federal Reserve Bank of Boston President Eric Rosengren said the Fed should buy mortgage bonds until the jobless rate falls to 7.25 percent and hold the target interest rate near zero until hitting 6.5 percent unemployment.
“As long as inflation and inflation expectations are expected to remain well-behaved in the medium term, we should continue to forcefully pursue asset purchases,” Rosengren said today in a speech in Wellesley, Massachusetts.
The Boston Fed chief’s proposal would set “a threshold, not a trigger,” he said at Babson College. Once achieved, “the assessment of continued asset purchases would commence.”
Rosengren joined fellow Fed regional bank presidents Charles Evans of Chicago and Narayana Kocherlakota of Minneapolis in proposing numerical thresholds the Fed should reach before beginning to reverse record accommodation. Many Fed officials advocate similar policy objectives focused on inflation and the labor market, according to minutes of a Sept. 12-13 policy meeting. They haven’t agreed on such thresholds.
Kocherlakota has said interest rates should stay low until unemployment falls below 5.5 percent, so long as the outlook for inflation does not breach 2.25 percent. Evans has said the central bank should promise to keep rates low until the unemployment rate falls to 7 percent, so long as inflation doesn’t exceed 3 percent.
The Federal Open Market Committee on Oct. 24 said it will continue buying $40 billion in mortgage-backed securities each month, aiming to reduce 7.8 percent unemployment. The central bank is also purchasing $45 billion of longer-term Treasuries, in a securities-swap program called Operation Twist scheduled to end in December.
Rosengren’s proposal contains two unemployment thresholds. While asset purchases would be reassessed and possibly ended at 7.25 percent unemployment, the Fed would keep its target interest rate near zero for longer.
“If inflationary pressures remain muted, then labor market conditions would need to be more like 6.5 percent unemployment to warrant the federal funds rate being lifted off the zero bound,” he said. The central bank has held the main interest rate near zero since December 2008.
Fed presidents rotate as voters on the central bank’s policy setting FOMC, with Rosengren voting next year.
Not all policy makers agree the central bank should adopt a numerical target for the jobless rate. Atlanta Fed President Dennis Lockhart said earlier today that the Fed shouldn’t tie policy to a single data point like the unemployment rate and instead should track broader measures of the job market.
“It’s appropriate to be cautious about relying on a single indicator of labor market trends, for example the unemployment rate, to determine whether the condition of substantial improvement has been met,” Lockhart said today in a speech in Chattanooga, Tennessee. An assessment of employment and the economy needs to be “reinforced by other indicators.”
Rosengren said once unemployment reaches 7.25 percent policy makers should assess “whether overall labor market conditions are consistent with ‘substantial Improvement’ -- for example, whether the lower unemployment rate reflects job creation rather than reductions in the labor force as discouraged workers stop seeking jobs.”
Fed officials will have more information on the state of unemployment tomorrow, when the Labor Department releases its monthly jobs report at 8:30 a.m. in Washington. Employment probably climbed by 125,000 in October following a 114,000 increase the month before, according to the median forecast in a Bloomberg survey. The jobless rate may climb to 7.9 percent from 7.8 percent, another survey showed.
Rosengren responded to audience questions about whether the Fed could buffer damage to the economy from Europe’s debt crisis and the risk Congress will abruptly raise taxes and cut spending, saying the Fed could “mitigate some of that risk but I don’t think we would be able to completely offset it.”
Asked if the U.S. would enter a new recession, Rosengren said, “I don’t expect that to happen.” If the economy avoids unexpected shocks, his “best guess would be the economy actually starts improving over the course of next year.”
Reports on the U.S. economy today showed private employers increased payrolls in October by the most in eight months and construction spending climbed in September to the highest level in almost three years. Also, manufacturing expanded more than forecast, and a measure of consumer confidence climbed to a four-year high.
The Roseland, New Jersey-based ADP Research Institute said companies expanded payrolls by 158,000 last month following a revised 114,000 gain in September.
U.S. stocks rose, sending benchmark indexes toward the biggest advance in seven weeks, in response to reports of an improving economy. The Standard & Poor’s 500 Index gained 1.1 percent to 1,427.55 in New York. The yield on the 10-year Treasury climbed 0.03 percentage point to 1.72 percent.
Rosengren, 55, has been among the most outspoken advocates of additional monetary stimulus this year, calling for an open- ended quantitative easing program and arguing that the central bank should extend its Operation Twist program.
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