Eric Rosengren of the Federal Reserve Bank of Boston addresses the Carroll School community
Annual Leadership Event
November 15, 2012
By Tim Gray
The U.S. Federal Reserve, the country’s central bank, will likely continue trying to reduce unemployment by stimulating the economy with low interest rates for several more years, Eric Rosengren, president of the Boston Federal Reserve Bank, told an audience of alumni and MBA students at the Boston College Club in early November.
The economy has been growing since 2010 but not enough to reduce the ranks of the unemployed to a healthy level, said Rosengren, who’d been invited to speak by BC’s Graduate School of Management and its Graduate Management Association.
“We’ve had a disappointing recovery,” he said. “We’ve averaged 2% growth [in gross domestic product]. We’re doing better than other advanced economies, but we’re growing too slowly to improve labor markets.”
The current unemployment rate is 7.9%. The Federal Open Market Committee (FOMC)—the Fed’s interest-rate setting arm—doesn’t have a numerical goal for unemployment, but Rosengren said that he’d opt for hewing to current policies until the rate fell at least to 7.25%. “I’d also like to see 3% GDP growth for a year,” he said. He stressed that he’s only one member of the FOMC and doesn’t speak for the group.
If Rosengren had his way, the Fed wouldn’t necessarily modify its policies when unemployment hit 7.25%. It would assess why unemployment had waned. If it had fallen because firms were hiring, the central bank might opt to dial back its growth-promotion efforts. But if the rate had dropped because workers had left the workforce, it might continue current policies. Workers who’ve stopped seeking jobs aren’t counted as unemployed.
Some commentators have warned that the Fed’s attempts to stimulate growth could lead to out-of-control inflation. Rosengren sees no evidence of that. He explained that the Fed aims to have its favored gauge of inflation, the Personal Consumption Expenditure (PCE) index, rise at about 2% a year. “Over the last 12 years, the PCE has grown at an average of 2.2%,” he said.
To stoke growth, the Fed has held one of the interest rates that it controls, the federal funds rate, near zero for several years. A low federal funds rate will usually jumpstart a sluggish economy. But the financial crisis of 2008-2009 and the subsequent recession were so severe that, this time, a low rate hasn’t brought strong growth. Thus the Fed has undertaken unconventional measures like buying mortgage-based securities.
In September, the central bank announced that it would buy $40 billion worth of mortgage-backed securities a month to try to reduce long-term interest rates, boost the economy and cut unemployment. In the past, the Fed has limited its bond purchases and sales to U.S. Treasuries.
Mortgage rates have since fallen, and mortgage refinancings and home purchases have risen. Perhaps even more important, home building appears to be recovering. “The housing sector was disproportionately affected by the recession,” Rosengren said. “It stayed low after the recovery began. But we’re finally starting to get a little kick in housing starts.” Auto loan rates have fallen, too, and auto sales have improved.
During a question-and-answer session after his talk, Rosengren fielded a question from an audience member who was concerned about the effect of the Fed’s policies on retirees and others whose incomes depend on interest from savings. Fed-induced low rates have cut those incomes. Rosengren said that the Fed was mindful of those effects but committed to lowering unemployment. “The worst outcome would be not to get unemployment down,” he said.
A potential threat to the Fed’s efforts is the impasse in Washington over the so-called fiscal cliff. The term “fiscal cliff” denotes a package of federal tax increases and spending cuts that will kick in automatically at the end of the year.
Both President Obama and congressional Republicans agree that raising taxes and cutting spending could knock the economy back into recession. But they can’t agree on a solution. The president supports a continuation of current tax rates for everyone except the wealthiest Americans. Congressional Republicans have insisted that current rates be extended for everyone. Neither side has signaled much willingness to compromise.
Rosengren said that he feared “a dysfunctional argument between now and the end of the year about the fiscal cliff.” That could cause “a negative shock to the economy,” he said. The Fed then would likely continue its efforts to encourage growth. “Monetary policy has to take fiscal policy as a given,” he added. “If fiscal policy is disruptive, all we can do is try to mitigate that.”