Federal Reserve Bank of Boston President Eric Rosengren said the Fed should be patient in removing accommodation because of persistent damage to the U.S. labor market.
“There remains significant slack in labor markets, above and beyond the slack usually represented by the standard unemployment rate,” which fell to 6.6 percent last month, Rosengren said today in remarks prepared for a speech in Boston. “Such conditions call for a very patient approach to removing monetary policy accommodation, particularly given the softness in recent economic data.”
Rosengren’s remarks echo Fed Chair Janet Yellen’s view that the job market has yet to make a full recovery from the longest and deepest recession since the Great Depression. She said in Feb. 11 congressional testimony that the recovery in U.S. employment is “far from complete.” Yellen plans to testify to the Senate Banking Committee tomorrow at 10 a.m..
Rosengren, a consistent supporter of the Fed’s stimulus who doesn’t vote on policy this year, initially opposed the central bank’s December decision to begin slowing the pace of bond purchases. Since then, he has said that while he would have preferred to start the tapering later, he supports the strategy of trimming bond buying in $10 billion increments at meetings of the Federal Open Market Committee.
The central bank may halt its reductions in the pace of bond purchases if the economy proves weak for reasons other than harsh winter weather, Rosengren said in response to audience questions.
“If we find out the economy is slow, not because of weather but because of underlying fundamentals,” then “we could certainly pause in terms of the tapering program,” he said.
The Fed is closely monitoring stability in emerging markets and prices in financial markets, he said in response to audience questions.
“We do look at it with a great deal of detail but the driver is still to think about how it impacts our domestic markets,” Rosengren said, referring to risk of instability among emerging markets. “We have to weigh that primarily against our own domestic objectives.”
Rosengren said he doesn’t generally see signs of excessive risk-taking.
“I don’t see a great deal of issue with the pricing in most financial markets and still see some significant problems in labor markets,” he said.
The Boston Fed chief said signs the job market is weak include slow growth in labor compensation and the 7.3 million people who must work part-time because they can’t find full-time jobs. He also said inflation has run persistently below the Fed’s 2 percent target, with the Fed’s preferred gauge rising 1.1 percent from a year earlier in December.
“The evidence provided by prices and compensation corroborate my argument that there continues to be significant slack in labor markets,” Rosengren said to the Boston Economic Club.
He said it’s unclear if recent weak economic data stemmed from harsh winter weather or “fundamental” weakness in the economy.
“This uncertainty provides an additional strong rationale for taking a patient approach to removing the monetary policy accommodation,” he said.