Fed’s Rosengren Sees Room to Expand QE to Spur Employment
Federal Reserve Bank of Boston President Eric Rosengren said the Fed could expand its $85 billion monthly bond buying should record easing not make progress in achieving full employment and stable prices.
“There is the capacity to enlarge it if that were to become necessary,” Rosengren, 55, said yesterday in a telephone interview with Bloomberg News.
Rosengren said in a Bloomberg Television interview today that enlarging the program would require “a substantially weaker economy than what we’re expecting now, so if we had a significant shock from Europe or China, if we ended up having a very disruptive discussion in Washington.”
The Boston Fed chief becomes a voting member of the Federal Open Market Committee this year as part of a rotation among Fed regional presidents. He will lend his voice to a debate over when to halt or shrink the $40 billion monthly purchases of mortgage bonds and $45 billion monthly purchases of Treasuries announced last year.
Asked if he worried about negative side effects from the Fed’s asset purchases, Rosengren said: “I certainly worry about the costs, and I also worry about the costs of having very high unemployment rates for extended periods of time.”
Minutes of the central bank’s most recent meeting showed policy makers already debating when it would be appropriate to halt purchases. “Several members” said it would be appropriate to slow or stop purchases “well before the end of 2013” and a “few” willing to let the program run to the end of the year.
Rosengren said it’s too early for policy makers to be strategizing around the end of their policies.
“I think it’s premature to be talking about exit,” he said today. “We need to get the economy to grow more quickly right now.”
Fed presidents rotate voting on monetary policy, with Rosengren scheduled to gain a voting seat at the Federal Open Market Committee’s Jan. 29-30 meeting. Also joining the committee will be Chicago’s Charles Evans, Kansas City’s Esther George and James Bullard of St. Louis.
Expanding on remarks made yesterday in a speech in Providence, Rhode Island, Rosengren said he expects the economy to strengthen in the second half of 2013 and he foresees the unemployment rate declining to 7.25 percent to 7.5 percent by the end of the year from 7.8 percent last month.
“We want substantial improvement in the labor markets, so getting the unemployment rate to decline by half a percent would be a good time to take a hard look at all the various labor- market indicators and make a determination of whether the economy was growing rapidly enough” to halt the purchases, he said.
If the economy doesn’t make that progress, Rosengren suggested that rather than slow or stop purchases, the Fed would have the option of enlarging them.
“We’re partly calibrating this on trying to get the appropriate amount of stimulus without creating market functioning problems,” he said. “Given the risks of market functioning problems I think we’ve appropriately calibrated it at this time, but if it became necessary to do more I think we have some capacity to do that.”
Congress has given the Fed a mandate to achieve stable prices and full employment. The Fed defines those goals as an inflation rate of 2 percent and currently estimates the jobs goal as an unemployment rate between 5.2 percent and 6 percent.
The Fed has made little progress on those goals in recent months. The unemployment rate has been 7.8 percent in three of the last four months, and the personal consumption expenditures price index has been below 2 percent for eight consecutive months.
In November, the 12-month rate of inflation fell to 1.4 percent. Excluding the volatile categories of food and energy, the personal consumption expenditures index has not been above 2 percent since 2008.
Rosengren said it may take a significant change in the outlook for the pace of purchases to be altered.
“The calibration of this tool is quite new, it’s very difficult to fine-tune,” he said. “Unless we were seeing a substantial change from what we were expecting, I would expect we would wait to see either material improvement or the economy doing materially worse than we expected, before we would think about changing the guidelines.”
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