Federal Reserve Bank of Boston President Eric Rosengren called for new monetary stimulus, saying the U.S. economic expansion is too weak to generate more growth in jobs.
“We should be looking for ways that monetary policy can foster more rapid growth, to bring down the unemployment rate more quickly,” Rosengren said today in a speech in Worcester, Massachusetts. “Further monetary policy accommodation is both appropriate and necessary.”
Rosengren joins Chicago Fed President Charles Evans in calling on fellow policy makers to take more steps to reduce a jobless rate persisting at 8.1 percent nearly three years into a recovery from the worst recession since the Great Depression.
Economists estimate the economy will add 150,000 jobs in May, according to the median of a Bloomberg News survey before a June 1 report from the Labor Department. The unemployment rate will be unchanged, according to the survey. The jobless rate first breached 8 percent in February 2009.
The Boston Fed chief, who does not vote on the Federal Open Market Committee this year, said more easing is warranted by his “expectations of only modest growth, no improvement in the unemployment rate, an inflation forecast below 2 percent and significant downside risks to the forecast.”
Additional accommodation is needed because most U.S. unemployment results from cyclical weakness rather than structural shifts in the economy’s composition, Rosengren said.
“My desire to stimulate more growth now is partly to prevent the structural problem from becoming more severe because the economy did not re-employ workers more quickly,” he said.
Wage data showing that most industries are seeing pay increases of 2 percent or less highlights that low aggregate demand is at the root of the economy’s weakness, Rosengren said.
Policy makers next meet in Washington on June 19-20 when they will consider what to do once their $400 billion maturity extension program, known as Operation Twist, expires in June. The central bank previously expanded its balance sheet by $2.3 trillion in two rounds of large scale asset purchases.
The Fed lowered its benchmark interest rate to zero in December 2008 and has said economic conditions will probably warrant holding the rate low through at least late 2014.
Asked by the audience about ways to increase stimulus, Rosengren said the Fed could opt for a new round of Operation Twist, extending the average duration of assets on its balance sheet. Or it could start a third round of large-scale asset purchases, focusing on either Treasuries or mortgages, he said.
Another option would be using communications to clarify how long the central bank intends to hold interest rates near zero, he said. He didn’t identify his preferred option.
Rosengren said his outlook is less favorable than those of most of his FOMC colleagues. His forecasts place him as one of the three most pessimistic forecasters among the 17 policy makers at the Fed’s April meeting.
At their April meeting, most policy makers said the economy would grow 2.4 percent to 2.9 percent and the unemployment rate would decline to 7.8 percent to 8 percent by the end of 2012.
“I am expecting growth of only 2.3 percent for the full year, I’m sorry to say,” Rosengren said. The unemployment rate probably won’t improve, and inflation on the personal consumption expenditures index will probably rise by 1.7 percent, he said.
In contrast, New York Fed President William C. Dudley said today the U.S. expansion will probably continue at a “moderate” pace and additional stimulus probably won’t be needed unless the economy falters.
“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs,” Dudley said in a speech in New York.
Rosengren said his forecast “reflects concern that the uncertainty about both Europe and the U.S. federal ‘fiscal cliff’ will restrain spending by households and businesses.” He also assumes “Europe and our own fiscal situation achieve a muddling through,” he said.
U.S. stocks fell today putting the Standard & Poor’s 500 Index on pace for its worst month since September, as concern grew about Greece’s future in the euro and the health of Spanish banks. The S&P 500 slid 1.4 percent to 1,313.32 in New York while the yield on the 10-year Treasury note fell to a record low 1.62 percent.
Dallas Fed President Richard Fisher said today Europe’s debt crisis has done more to reduce yields than Operation Twist.
“We are the beneficiary” of Europe’s crisis because it makes the U.S. look “relatively handsome,” Fisher said in response to a question from the audience after a speech in San Antonio, Texas. “That’s one of the reasons interest rates are so low.”
Rosengren said that U.S. banks are “much better capitalized than they were in 2007,” adding that “if we really had a disorganized failure in Europe it would be hard to fully insulate our economy.”
Rosengren, 54, was formerly the head of banking supervision and regulation at the bank. He became president of the Boston Fed in 2007.