Two Federal Reserve regional bank presidents indicated that the central bank won’t remove record stimulus soon, saying the Fed is missing its goal for full employment and inflation isn’t a long-term risk.
Eric Rosengren, president of the Federal Reserve Bank of Boston, and San Francisco’s John C. Williams followed the lead taken by Fed Chairman Ben S. Bernanke, who signaled last week that policy makers will keep stimulus in place after ending large-scale bond purchases in June.
“Right now we’re pretty far away from our targets, and right now we’re keeping monetary policy accommodative,” Rosengren, 53, said yesterday in an interview with Bloomberg News. “It’s very appropriate given how far we are from our targets.”
Bernanke and his colleagues on the Federal Open Market Committee said last week that the economy, which has added an average of 149,000 jobs a month over the last six months, is recovering at a “moderate pace.” For interest rates to rise, “we’d have to see much more job growth than we’ve seen to date,” Rosengren said in the interview.
U.S. stocks fell yesterday and bonds climbed after private reports showed that companies added fewer workers than forecast in April and service industries expanded at the slowest pace in eight months. A Labor Department report tomorrow may show that the jobless rate was unchanged at 8.8 percent last month and 185,000 jobs were added to payrolls, according to the median estimates in a Bloomberg survey.
The Standard & Poor’s 500 Index lost 0.7 percent to 1,347.32 in New York trading. The yield on the 10-year Treasury note fell to 3.22 percent from 3.25 percent.
Another regional Fed bank president, Atlanta’s Dennis Lockhart, predicted average monthly payroll growth of 200,000 from April through the end of the year. At that pace, he said, it would take three years for the workforce to reach its pre- recession level.
Rosengren said unemployment is “well above” the long-term norm of about 5 percent to 6 percent, “so we need to stimulate the economy enough to get much more job growth.”
The Dallas Fed’s Richard Fisher offered a contrasting view yesterday at a speech yesterday in Las Cruces, New Mexico, saying the central bank has done all it can to revive growth and that he will be at the forefront of calling for tighter credit to fight inflation if needed.
Bernanke said last week that the Fed would continue reinvesting proceeds from maturing securities to keep the Fed’s balance sheet stable after finishing large-scale purchases in June. The unemployment rate dropped to 8.8 percent in March from 9.8 percent in November, the month the Fed began its $600 billion bond-purchase program to boost the recovery and stave off deflation.
Asked whether a third round of so-called quantitative easing was still under consideration, Rosengren said that “nothing’s off the table, it depends on economic conditions, so we have to do whatever makes sense given our outlook for the economy.”
“If we were to see inflation rates going down dramatically and the unemployment rate going up dramatically, we’d have to reexamine what our monetary policy is,” he said. “That’s not something I expect, that’s not something that’s in most people’s forecasts.”
The Fed’s key measure of inflation, which excludes food and energy, rose 0.9 percent in March from a year earlier. That compares with a long-term inflation goal of about 2 percent.
Williams, in a speech in Los Angeles yesterday, said excess capacity in the economy “will likely persist for several years” and that a period of high inflation is “very unlikely.”
The economy faces “persistent headwinds” such as high gasoline prices and a “severely depressed” housing market, Williams said in his first comments on policy since taking charge at the San Francisco Fed in March.
Williams, 48, predicted the world’s largest economy will grow at a 3 percent pace in the current quarter, up from 1.8 percent in the first three months of the year.
Policy makers last month lowered their forecasts for growth this year and raised estimates for so-called core inflation.
The inflation rate should peak in the middle of the year before returning to an annual level of 1.25 percent to 1.5 percent, said Williams, backing the Fed’s view that surging commodity prices will have a “transitory” effect on inflation.
Investors share that assessment. Market expectations, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds, predict inflation of 2.8 percent in the next year, declining to 2.5 percent over two years and 2.4 percent over the next five years.
Commodity-price gains are the result of global supply and demand and are unlikely to persist over the long term, Williams said. They represent only a “small portion” of the cost of finished goods, and long-term inflation expectations are stable, he said.
The wage-price spiral of the 1970s is “largely absent today,” he said, adding that Fed policies are unlikely to account for more than “a very small portion” of commodity- price increases.
Williams, who has worked in the Fed system since 1994, was a senior economist for the Council of Economic Advisers during the Clinton administration. He succeeded Janet Yellen, who became the Fed board’s vice chairman in October.
Rosengren joined the Boston Fed as an economist in 1985 and became its president in 2007. Fed presidents rotate voting on monetary policy, with Rosengren next voting in 2013. At the Fed’s December 2007 meeting, he became the only currently serving policy maker to dissent from a FOMC decision in favor of more accommodative policy.
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