Fed’s Rosengren Backs Bond Buying Through ’13 to Lift GrowthSteve Matthews and Michelle Jamrisko
Federal Reserve Bank of Boston President Eric Rosengren said he wants to continue the central bank’s bond purchases through year’s end and raise or lower the pace in response to economic data.
Fed policy should pursue “faster economic growth and a more rapid improvement in the unemployment rate,” Rosengren said in the text of remarks prepared for delivery in Manchester, New Hampshire. “We should continue our large-scale asset purchases of Treasury and mortgage-backed securities through this year -- although the amount may need to be adjusted up or down, depending on how the economic situation evolves.”
Rosengren, who votes on monetary policy this year, has supported the central bank’s monthly purchases of $85 billion in Treasuries and mortgage-backed securities as a means to try to bring down 7.7 percent unemployment. The Fed previously bought $2.3 trillion of assets in two earlier quantitative-easing programs.
Fed Chairman Ben S. Bernanke said last week the central bank would alter monthly buying in response to gains in the job market, underscoring a need for flexibility. He said further gains would be needed to be sure “this is not a temporary improvement.”
While recent economic reports have been slightly better than expected, the U.S. economy may grow at a rate of “a bit above 2 percent” in the first half of this year, Rosengren said to the Business and Industry Association of New Hampshire and the state’s bankers’ association. He said the benefits of the bond-buying program outweigh the costs, and minimized concerns that the Fed’s record-high balance sheet would spur inflation or cause financial instability.
“Fiscal austerity has been offset in part by improvements in housing and also auto sales,” he said. “Housing and autos are the most interest-sensitive components of GDP, and their strength partly reflects the positive impact of Federal Reserve policies to push long-term interest rates down with our large-scale asset purchase program.”
Rosengren said the central bank should reduce its bond buying as the economy improves and at some point it should stop purchases.
“On the other hand, if the economy does much worse, we have the option of buying more of them,” Rosengren said in response to audience questions. “There’s additional things we can do if we need to do, including just expanding some of the things” already under way, he said.
Fed policy makers expect U.S. unemployment to fall to 6.9 percent to 7.6 percent by the fourth quarter, and Rosengren said in his prepared remarks his forecast was for “just above the midpoint” of 7.25 percent. Despite the progress, unemployment remains “far higher” than the 5.25 percent rate the economy is likely to return to over time, he said.
Boston Fed research suggests each $500 billion in asset purchases has led to a quarter-point decline in the unemployment rate and the creation of about 400,000 jobs, Rosengren said.
Meanwhile, an index of inflation tied to spending patterns rose 1.2 percent in the year ended in January, which is “far below” the Fed’s target of 2 percent, he said.
Rosengren spent much of his speech addressing concerns, raised this year by Fed Governor Jeremy Stein and Kansas City Fed President Esther George, that low interest rates could lead to excessive risk-taking and therefore threaten financial stability.
“I see little evidence that our monetary policies are generating significant financial stability problems at this time,” he said.
While U.S. stock prices have risen, the gains have been largely in tandem with corporate earnings and the price-earnings ratio for the Standard & Poor’s 500 index remains below its 20-year average, Rosengren said. Home prices are below their peaks, and about in line with rental rates, he said.
High-yield bond rates have dropped, though most of the decline has been in line with U.S. Treasury yields, the Boston Fed chief said. The largest U.S. banks are much better positioned to withstand shocks because they have considerably more capital than in 2008, he said.
While farmland prices have surged, any threat is likely to be concentrated in small banks and should be dealt with by bank supervision rather than monetary policy, which would be “a very blunt tool,” Rosengren said.
“While the Federal Reserve’s accommodative monetary policy has been an important driver of the current economic recovery, and the financial stability costs appear relatively modest at this time, we cannot be Pollyannas,” he said.
The Fed should continue to closely monitor whether central bank stimulus is “having unintended consequences,” the Boston Fed leader said, and areas of focus may include quality of covenants on high-yield bonds. Covenants are legally binding agreements in which the borrower agrees to certain stipulations over the life of the loan.
“Bond covenants are intended to protect investors, and the issuance of bonds that reduce or eliminate common covenants in their contracts could become an area of concern,” Rosengren said. “In fact, there is some evidence that some new bond issuance reduces covenants that protect investors.”
The average covenant score for speculative-grade bonds, in which 1 is the strongest and 5 is the weakest, was 3.96 in February, according to Moody’s Investors Service, the weakest reading since the ratings company began tracking the data in January 2011. High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s.
Rosengren said other areas of focus should include the growth of real estate investment trusts, money market mutual funds, and concerns with broker-dealers and wholesale funding markets.
When the central bank began its third round of large-scale asset purchases in September, the most recent Labor Department report showed the unemployment rate was 8.1 percent. Joblessness fell to 7.7 percent in February, and monthly payroll growth has averaged almost 200,000 since October.
Even so, the labor market is far from making up the losses it sustained during the 18-month recession that ended in June 2009. The economy lost 8.8 million jobs as a result of the recession, and it has since regained 5.7 million.
Fed officials have varying views of how far along the recovery is. New York Fed President William C. Dudley this week said it’s “too soon to take much cheer from the recent economic news” because reports have had ups and downs, while Dallas Fed President Richard Fisher said he favors reducing mortgage bond purchases in light of a “pretty robust housing situation.”
Rosengren, 55, became president of the Boston Fed in July 2007, and had previously served in the economic and supervision departments of the bank. The Boston Fed district includes Connecticut excluding Fairfield County, Massachusetts, Maine, New Hampshire, Rhode Island and Vermont.