Rosengren Says Significant Fed Accommodation Still Needed

Federal Reserve Bank of Boston President Eric Rosengren said the Fed should press on with record stimulus to speed economic growth, reduce 7.5 percent unemployment and boost inflation running below 2 percent.

While the labor market has improved, “significant accommodation remains appropriate at this time,” Rosengren said today in a speech in Minneapolis. “If the incoming economic data do not reflect improvements consistent with both elements of our dual mandate, I believe the Fed should be willing to increase asset purchases,” he said, referring to the central bank’s goal to achieve stable prices and full employment.

The Boston Fed chief is among policy makers warning that inflation -- which slowed to 1 percent in March as measured by the personal consumption expenditures index -- could impair growth should it decline further. A voter this year on monetary policy, Rosengren echoed testimony last week by Chairman Ben S. Bernanke, who said “premature tightening” could reduce inflation and jeopardize the economic expansion.

Rosengren has consistently backed the Fed’s record stimulus. He dissented at a December 2007 Federal Open Market Committee meeting because he favored more accommodative policy.

With unemployment lingering at 7.5 percent, higher than before the last recession, the FOMC announced May 1 that it will increase or decrease the pace of its monthly bond purchases in response to changes in inflation and the labor market. The policy makers agreed to maintain monthly buying of $40 billion in mortgage securities and $45 billion of U.S. Treasuries in a bid to boost employment. The purchases have expanded total Fed assets to $3.4 trillion.

No Halt

Rosengren cautioned against suddenly halting the buying.

“It may be undesirable to abruptly stop purchases,” he said. “So it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy.”

Rosengren said in response to an audience question that he wants to see consistent monthly increases in U.S. payrolls exceeding 200,000. Policy makers should review a range of indicators for employment and be able to determine that the “labor market has healed sufficiently that it’s time to remove the accommodation,” he said.

The yield on the 10-year Treasury note fell 0.04 percentage point to 2.12 percent at 3:18 p.m. in New York, while the Standard & Poor’s 500 Index declined 0.6 percent to 1,650.32.

Near Zero

Fed officials have left the benchmark lending rate near zero since December 2008.

Reversing the unprecedented accommodation “could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said in testimony to the Joint Economic Committee of Congress.

Soaring stock prices, housing gains and improving consumer confidence indicate the expansion may be gaining momentum. The Standard & Poor’s 500 Index has advanced 16.4 percent this year through yesterday’s close.

The Conference Board’s sentiment index rose to 76.2 in May, exceeding all estimates in a Bloomberg survey of economists and the highest since February 2008, data from the New York-based private research group showed yesterday.

The measure is in line with the Bloomberg Consumer Comfort Index, which climbed to a five-year high in the week ended April 28, and the Thomson Reuters/University of Michigan preliminary consumer sentiment reading that was at its strongest in May since July 2007.

Balance Sheets

Rising home prices are bolstering household balance sheets and Americans’ spirits. The S&P/Case-Shiller index of property values in 20 cities increased 10.9 percent in the year to March, the biggest 12-month gain since April 2006.

Still, the Fed isn’t meeting its congressional mandate to ensure price stability, Rosengren said.

“Core inflation remains at the very low end of recent experience, and the unemployment rate is close to the cyclical peaks of the past two recessions,” he said.

Failure to address low inflation could put the U.S. on the path of Japan, where deflation has become “quite difficult to reverse,” Rosengren said in May 16 remarks in Milan. Prices lingering below the Fed’s 2 percent target may mean policy “has not been sufficiently accommodative,” he said.

St. Louis Fed President James Bullard said May 23 in London that more disinflation could prompt additional asset purchases by the central bank. Charles Evans, head of the Chicago Fed, said May 9 that inflation is “too low,” though “it’s too early” to respond with a policy shift.

Rosengren, 55, became president of the Boston Fed in July 2007, and previously served in the economic and supervision departments of the bank. The Boston Fed covers Connecticut excluding Fairfield County, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.

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