Rosengren Says Fed Exit From Stimulus Should Only Be Gradual

Federal Reserve Bank of Boston President Eric Rosengren, the only dissenter against a Fed decision to taper bond buying, said policy makers should avoid hurting the economy and cut stimulus “only very gradually.”

“This recovery has already been too slow, and we do not want premature tightening of monetary policy to delay the return to more normal economic conditions,” Rosengren said today in a speech in Hartford, Connecticut. “A very gradual normalization is very appropriate given that the unemployment rate remains unusually high and the inflation rate remains unusually low.”

The Federal Open Market Committee last month decided to taper its asset purchases to $75 billion a month from $85 billion, citing an improved outlook for the labor market.

Policy makers are scheduled to meet Jan. 28-29 and will probably reduce purchases in $10 billion increments over the next seven meetings before ending them in December, according to a Bloomberg News survey of economists after the FOMC announced a reduction in bond buying on Dec. 18.

Rosengren, who doesn’t hold a policy vote this year, said he expects the economy to expand at a 3 percent pace in 2014, “consistent with stronger employment growth and declines in the unemployment rate.” Joblessness fell to 7 percent in November.

“All of us who follow the economy have been waiting for the drag from fiscal austerity to wane, for consumers to regain confidence and increase demand, and for the housing market to solidify its nascent recovery,” Rosengren said.

‘Stronger Growth’

Rosengren said in response to an audience question that the rise in health care costs has slowed, and that he doesn’t see its impact “preventing stronger growth” in consumer spending.

“Our forecast for consumption is reasonably strong,” he said.

Yields on the benchmark 10-year Treasury note dropped for a second day as investors assessed the Fed’s case for additional tapering of stimulus. Yields fell about one basis point, or 0.01 percentage point, to 2.95 percent at 10:52 a.m. in New York, while the Standard & Poor’s 500 Index rose 0.7 percent to 1,839.05 in New York trading.

Still, the U.S. economy is “far from where we need to be” and “the Federal Reserve continues to miss both elements of its dual mandate from Congress -– inflation and employment -– by fairly large margins,” Rosengren said.

Consumer prices rose 0.9 percent in November from a year earlier, according to an inflation measure watched by the Fed. The central bank aims for inflation of about 2 percent.

‘Real Concern’

“Inflation rates persistently below the stated target can be a cause for real concern,” Rosengren said.

Too-low inflation increases the risk that a “negative shock” to the economy could cause deflation, he said. It also results in higher inflation-adjusted interest rates, making it harder to achieve a sufficient pace of economic growth, he said.

“Furthermore, persistently low inflation can theoretically undermine the credibility of the central bank,” he said. “If the central bank announces an inflation target but is unable to achieve that target in a reasonable time frame, some may call into question its ability to do so in the medium- or long-term as well.”

A slow economic recovery poses “significant costs” to the labor market, putting strain on the unemployed and potentially leading their skills to atrophy, he said. It may also have “longer-lasting and structural implications for labor markets and the economy.”

(Updates markets in ninth paragraph.)
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