Federal Reserve Bank of Boston President Eric Rosengren said the central bank still has tools to boost an “anemic” recovery and should consider further action to cut unemployment and raise the inflation rate.
Policy makers must respond “vigorously, creatively, thoughtfully and persistently, as long as we have options at our disposal,” Rosengren said in the text of remarks to the Forecasters Club of New York today. “And we do have options, despite having pushed short-term rates to the zero lower bound.”
Rosengren’s comments put him at odds with Charles Plosser, head of the Philadelphia Fed, who said earlier today that he’s against further monetary expansion because he sees “little risk” of deflation. Central bankers said after a meeting on Sept. 21 that too-low inflation and sluggish growth may warrant an easing of monetary policy, including resuming large-scale asset purchases.
While Rosengren stopped short of explicitly endorsing that option, he said it would highlight the Fed’s determination to reduce disinflationary pressures and stimulate the economy by reducing long-term interest rates.
“Current economic conditions — an unemployment rate near 10 percent, sluggish growth, and undesirably low inflation — together constitute a serious economic problem,” said Rosengren, 53, who is a voting member of the policy making Federal Open Market Committee this year.
Fed officials said in their statement this month that inflation is “somewhat below” levels consistent with their congressional mandate for price stability.
One gauge of inflation — the personal consumption expenditures index, minus food and energy — was up 1.4 percent in the 12 months to July and has been lower than 2 percent since November 2008. That compares with a long-term inflation goal of between 1.7 percent and 2 percent.
“One of the reasons we worry about a too-low rate of inflation is that the closer to zero the inflation rate gets, the greater the risk it could fall into a harmful deflation,” Plosser said, referring to a sustained and broad-based decline in prices that can harm the economy by reducing corporate profits and increasing the value of debts.
Fed Bank of Minneapolis President Narayana Kocherlakota said today that a second round of Treasury purchases would have a “muted effect” on the economy because financial markets are functioning better now than in early 2009.
Yesterday, Fed Bank of Atlanta President Dennis Lockhart said it’s “not a foregone conclusion that more accommodation is required” because it’s not clear “what exactly the problem is.”
Rosengren said that policy makers must weigh the costs and benefits of additional asset purchases.
“There are concerns about things like creating distortions in credit allocation, complicating exit strategies when they become appropriate, and exposing the Federal Reserve to interest-rate risk,” Rosengren said. “Those issues are important to recognize, and to work to mitigate. At the same time, we cannot take lightly how far off the mark unemployment and inflation seem to be.”
By buying long-term Treasuries, the central bank would likely lower interest rates on government bonds and other long- term securities, Rosengren said. The Fed would also expand its balance sheet through securities purchases, which would increase the amount of reserves available to banks.
© Copyright 2017 Bloomberg News. All rights reserved.