Federal Reserve Bank of Boston Eric S. Rosengren, president of the Federal Reserve Bank of Boston.
Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said in an interview that he wanted to see the economy adding at least 200,000 jobs a month in addition to a declining unemployment rate before he would be ready to consider scaling back the Fed’s efforts to stimulate the economy.
Other Fed officials have made similar statements in recent weeks, reflecting concern that the unemployment rate is declining because fewer people are looking for work, and not because faster growth is creating opportunities.
But Mr. Rosengren also expressed optimism that the economic recovery was gaining strength, and that growth could reach 3 percent this year.
We spoke during a Boston Fed conference focused on the Fed’s commitment to reducing unemployment. The transcript is edited for clarity.
Do you believe in spring swoons? Are we swooning now?
I wouldn’t put too much weight on any one data point. February, things seemed unusually strong. The unemployment report and some of the things we’ve gotten this week have been a little bit weaker. We’ll have to see which of those two ends up being a more accurate projection of what’s going to be happening.
It’s been a little bit of a surprise that it looks like we’re going to get roughly 3 percent G.D.P. growth in the first quarter. That’s certainly stronger than I think most people were expecting. It looks like we are going to be getting a little bit of a weakening in the second quarter. I’m expecting closer to 1.5 [percent growth]. Average those two and you get 2.25 [percent growth over the first half of the year]. I do think there’s enough underlying strength in the economy that as we get into the second half of the year we’re going to get much closer to 3 percent.
We do have to get through this period where fiscal policy is removing some of the accommodation that we’re trying to put into the market. Assuming we don’t get any negative shocks, I think there’s enough underlying strength that this won’t look like a spring swoon. It will look like a little bit of a lull. I hope that I’m right.
Consumer spending has been strong despite the higher payroll taxes that took effect in January. Do you think the predicted impacts were overstated? It is possible that the impact of the sequestration cuts also will fall short of expectations?
I think it was a little surprising how strong consumption was in the first quarter. I do think it had some impact. If you talk to retailers, people that have restaurants, particularly that were more focused on low- and medium-income customers, they were seeing an impact from the payroll tax. But there was stronger underlying strength in the economy at that time. In the absence of fiscal austerity we would have seen some pretty good momentum in the first half of the year. Some things also don’t happen immediately; people sometimes take time to respond. I’m reasonably confident that despite what’s happening with government spending, we’re getting modest growth. Otherwise, we’d be getting strong growth.
Unemployment remains higher than you’d like –
That’s an understatement.
So why aren’t you advocating for the Fed to do even more?
I think ideally it would actually come from the fiscal side. My own forecast is we’ll get to roughly 7.25 percent unemployment by the end of the year. I would continue our program and if we get to 7.25 and we’re starting to see payroll growth that is north of 200,000, and it looks like we’re getting a real self-sustaining recovery then I think you can make an argument [that it’s time to curtail asset purchases].
I think we need to be careful about what kind of side effects we’re having. My own sense is that the economy is picking up, the unemployment rate will be coming down. This is a fairly significant degree of accommodation. Long-term rates are quite low. We are seeing an impact from our policies. I think we’re pushing the interest-sensitive sector about as far as we’re going to be able to push it at this time.
The sectors that we can’t control — federal, state and local spending — have been a drag on the economy. We’ve been having fiscal austerity, we have more now than we had before, so monetary policy is trying to offset some of the fiscal austerity.
Are you concerned that the Fed’s efforts to drive down borrowing costs, and to increase risk-taking, are reinflating speculative bubbles?
I talked about this in a recent speech. If you look at prices, we’re nowhere close to where we were at the peak. I think we’re getting the economy more quickly to where it should be. I don’t think in any way that the actions we’ve taken to date are creating the kind of financial instability that would offset the advantages of trying to push the unemployment rate down a little more quickly.
If the unemployment rate falls to 6.5 percent, but only – or mostly — because fewer people are looking for work, is that good enough, or at least as good as it gets? Would the Fed declare victory and start to raise short-term interest rates?
We do not want to get to 6.5 percent just by having people pull out of the labor force. We want to get to 6.5 because employment is expanding and we’re adding jobs faster than labor force growth. If we end up at 6.5 percent and it was only because people pulled out of the labor force, that would not be substantial improvement in labor markets, that would mean that I would not be seeing the evidence that I would want to be seeing that we should be moving short-term rates.
You spoke Friday about the importance of the Fed’s dual mandate. But the Fed historically has behaved pretty much like every other major central bank. It seeks to control inflation and then it seeks to stimulate growth as much as possible, so long as inflation remains low. Where’s the evidence that the dual mandate matters?
Look at the March statement. You would not see that kind of statement out of the Bank of England, the Riksbank or the European Central Bank because they do have only a single mandate. It’s hard enough to explain monetary policy, but fairly unsophisticated people can understand that we’re going to keep interest rates low until unemployment hits 6.5 percent. In terms of a communication device, that’s a very clear difference. It’s observable, it’s credible, it’s easy to see whether we’re doing it or not doing it.
And you see the difference when you’re tracking closer to 2 percent inflation and still willing to take accommodative policy. We haven’t been near 2 percent in the last few years, but our willingness to maintain a pretty accommodative policy will be in some sense the test that we’re actually putting weight on how high the unemployment rate is.
Are you concerned about increased income inequality? Is there anything the Fed can do to address what appear to be increasingly entrenched inequalities?
One of the biggest things that causes your wealth to go down is a spell of unemployment. You go through a spell of unemployment, it dramatically affects a variety of things: your earnings not only immediately but over the next 10 years. And the longer the duration of the unemployment, the bigger the effect. So I think the most direct way we can have a difference is to try to bring the unemployment rate down as quickly as we can.
(Mr. Rosengren also noted that the Boston Fed is sponsoring a grant competition, the Working Cities Challenge, to improve economic conditions in the former factory towns that dot Massachusetts. The grants build on Boston Fed research showing that “industry mix, demographic makeup, and geographic location made less difference to success than the presence of a community leader and collaboration around a vision for the future.”)
Article source: http://economix.blogs.nytimes.com/2013/04/15/a-chat-with-the-boston-feds-chief/?partner=rss&emc=rss
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