Tags: Fed | Rosengren | Easing | Averted | Worsening | Pain | Job

Fed’s Rosengren: More Easing Averted ‘Worsening Pain’ in Job Market

Wednesday, 17 Nov 2010 08:48 AM

Federal Reserve Bank of Boston President Eric Rosengren said that the central bank risked a worsening outlook for inflation and jobs if it hadn’t embarked this month on a second round of unconventional monetary stimulus.

“Not changing policy risked further disinflation, a rise in the real cost of funds tantamount to monetary tightening, and risks of continued and possibly worsening pain in labor markets,” Rosengren said today in the text of remarks prepared for a speech in Providence, Rhode Island. “There are real and significant long-term costs to individuals and the economy when the unemployment rate remains stubbornly high.”

The policy-setting Federal Open Market Committee on Nov. 3 announced it would buy $600 billion of Treasuries through June to combat too-low inflation and an unemployment rate that’s hovering near a 26-year high.

The announcement has prompted criticism in the U.S. and abroad, with a group of 23 people including former Republican government officials and economists publishing a letter this week to Fed Chairman Ben S. Bernanke urging him to halt the expansion of monetary stimulus because it risks an inflation surge. German Finance Minister Wolfgang Schaeuble has also called the Fed’s asset-purchase program “clueless” and suggested it is designed to erode the value of the U.S. dollar.

Rosengren, 53, defended the central bank’s strategy, saying he is “very confident of the Fed’s ability and will to exit, when necessary.” He also said devaluing the dollar is “not a goal of our policies,” though it will “stimulate exports and reduce imports,” which is a “normal consequence” of monetary easing.

More Stimulus

Rosengren reinforced comments made yesterday by St. Louis Fed President James Bullard and Atlanta Fed President Dennis Lockhart that the additional stimulus was warranted. New York Fed President William Dudley also defended the Fed’s decision this week to CNBC, saying that critics don’t “understand clearly” the Fed’s ability to tighten monetary policy.

“The policy change we at the Fed just announced was consistent with the central bank’s mandate, given how far the national economy is from our gauges of health,” Rosengren said. “In short you see unemployment close to double the mandate- consistent target, and inflation about half of what we consider consistent with price stability.”

Rosengren also said yesterday in an interview with Bloomberg News that he expects the central bank to buy the full $600 billion of Treasuries in order to create jobs. The Boston Fed estimates the program will help reduce the unemployment rate by about 0.5 percentage point by the end of 2012, the equivalent of creating 700,000 jobs, he said.

Lower Rate

“Instead of relying on the indirect effects of targeting a lower funds rate, we are opting to more directly affect the interest rates that have the greatest connection to real spending; by buying Treasury bonds and creating additional bank reserves,” Rosengren said. “Like conventional policy, one would expect that mortgage and corporate rates will fall, and exchange rates will be impacted, providing additional stimulus to the economy.”

The Fed has kept its benchmark interest rate near zero since December 2008.

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Federal Reserve Bank of Boston President Eric Rosengren said that the central bank risked a worsening outlook for inflation and jobs if it hadn t embarked this month on a second round of unconventional monetary stimulus. Not changing policy risked further disinflation, a...
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Wednesday, 17 Nov 2010 08:48 AM
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