Rosengren Says Budget Conflict Meant Forgoing QE Taper
(Corrects figure on budget deficit as a percentage of GDP in 16th paragraph.)
Federal Reserve Bank of Boston President Eric Rosengren, a consistent backer of record stimulus who votes on policy this year, said the Fed refrained from tapering its bond purchases last month because growth was lower than forecast and fiscal policy posed a risk to the outlook.
“Had U.S. fiscal matters not been so problematic, and incoming data on real GDP and employment stronger, it may well have been appropriate to take some action in September,” Rosengren said today in a speech in Burlington, Vermont, referring to gross domestic product. “Unfortunately, those were not the facts we faced” at a policy meeting on Sept. 17-18.
The Federal Open Market Committee surprised investors last month by maintaining its $85 billion monthly pace of bond purchases. The Fed kept stimulus in place as Congress debates how to resolve the first government shutdown in 17 years and whether to raise the nation’s debt limit.
“If this lingers for a while, it endangers the economic recovery at best,” JetBlue CEO Dave Barger said in an interview. “If this percolates into the psyche of business and everybody starts to back off travel spending and it can trickle down to others. This is really serious.”
Berger’s comments echoed remarks by David Cote, chief executive of Honeywell, the Morris Township, New Jersey-based manufacturer, who said Sept. 30 that a fiscal impasse may plunge the world’s largest economy into a recession.
“Everyone will get more conservative and pull back on hiring and investing,” Cote, who served on President Barack Obama’s bipartisan National Commission on Fiscal Responsibility and Reform, said in an interview with Bloomberg Television’s Trish Regan.
Federal budget cuts have already harmed the economy, and additional reductions may cause more damage, Rosengren said.
“While some of the effects of fiscal austerity will eventually ebb, to date fiscal austerity is one reason we have yet to see growth much faster than 2 percent,” Rosengren said to the Lake Champlain Regional Chamber of Commerce.
“Unfortunately, this remains an area of significant uncertainty, given debates in Congress” on funding the government past the Sept. 30 end of the fiscal year “and potentially allowing the country to default on its debt,” he said. “The uncertainties, not to mention the outcomes themselves, threaten to have a collateral impact on the rest of the economy.”
Obama summoned the top four leaders of Congress to the White House for the first high-level talks on reopening the government. Jay Carney, the White House press secretary, said the bipartisan Oval Office meeting at 5:30 p.m. wouldn’t be a negotiation.
The first partial government closing since 1996, which began yesterday, may delay the time when policy makers can make a full assessment of economic performance as they debate whether to dial down bond purchases, Rosengren said in response to an audience question.
The suspension “pushes further into the future the time we can get a real assessment of where the economy is,” he said. “It is going to be much harder to get a gauge of what’s happening in the economy if we don’t have” government statistics produced by agencies that are closed.
A partial government shutdown lasting a week would probably shave 0.1 percentage point from economic growth, according to the median estimate of 40 economists in a Bloomberg survey.
The closing has furloughed almost 800,000 employees as offices, parks and museums closed. It may cost the U.S. at least $300 million per day in lost output at first, according to IHS Inc. (IHS), which estimates annualized growth in the fourth quarter will be reduced 0.16 percentage point in a week-long closing.
The shutdown comes as U.S. budget deficits have been shrinking. The deficit in June was 4.2 percent of GDP, down from 10.1 percent in February 2010 and the narrowest since November 2008, when Obama was elected to his first term, according to data compiled by Bloomberg from the Treasury Department and the Bureau of Economic Analysis.
Congress and the White House must also agree on raising the country’s $16.7 trillion debt ceiling. Treasury Secretary Jacob J. Lew said the U.S. has begun final extraordinary measures intended to avoid breaching the limit, which will be exhausted no later than Oct. 17.
Rosengren said in an interview with the Fox Business Network that the Fed should “keep all options on the table,” adding that fiscal policy has been more disruptive than anticipated.
The Standard & Poor’s 500 Index fell 0.1 percent to 1,693.87 in New York, while the yield on the 10-year Treasury note declined 0.03 percentage point to 2.62 percent.
Rosengren, 56, said he “strongly and unequivocally” supported the Fed’s decision not to taper asset buying. The median estimate in a Bloomberg survey before the FOMC meeting was for a $5 billion reduction in purchases.
“Fed actions are not determined by Wall Street’s expectations of what we might or should do,” Rosengren said. “Rather, our policies need to be consistent with achieving key goals like supporting Main Street’s more rapid return to full employment” and averting too-low inflation.
Rosengren supported sustaining bond purchases because long-term interest rates had risen too much, threatening to impair borrowing for the car and home purchases that have fueled growth this year, he said.
The Fed may remove stimulus if the economy quickens, or add “more accommodation than is currently anticipated” if the economy unexpectedly slumps.
“If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years,” he said. “And that should only occur when the data ratify our forecast for an improvement in real GDP and employment.”
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