By Ben Berkowitz
QUINCY, Mass., Sept 20 The Federal Reserve's new
stimulus policy is essential to get the U.S. recovery back on
track and to avoid damaging economic stagnation, a top Fed
official said on Thursday.
Boston Fed President Eric Rosengren said he strongly
supported the U.S. central bank's decision last week to launch a
potentially massive program of asset purchases, arguing its
risks are considerably smaller and more manageable than doing
He also said there was clear evidence that the move was
working already, especially with wholesale mortgage rates, and
that the market response across asset classes had been roughly
what the Fed had expected.
"The actions taken by the Federal Reserve last week provide
significant additional support to the economic recovery,"
Rosengren, a dovish Fed policymaker, said in prepared remarks to
the South Shore Chamber of Commerce in Quincy, Massachusetts.
"They should result in stronger economic growth, and return
us to full employment more quickly than would be the case absent
the policies," he said.
In a question-and-answer session after his speech, Rosengren
said the Boston Fed's position was that the natural unemployment
rate should be at the lower end of a range of 5 percent to 6
percent. Other regional Fed banks are probably at the higher end
of that range, he added.
"The unemployment rate is much higher than where we think
it'll be in the long run," he said.
Though Rosengren does not have a vote this year on U.S.
monetary policy, his endorsement of the Fed's third round of
so-called quantitative easing, or QE3, amplifies Fed Chairman
Ben Bernanke's argument that the Fed should do all it can to
revive growth and get Americans back to work.
"It's not that we expect really bad outcomes, it's that we
want stronger growth than what we've been seeing," Rosengren
told a packed ballroom of local bankers and business leaders.
AVOIDING A RETREAT
The Fed last week launched an aggressive plan to pump $40
billion into the economy per month with no set end date.
Instead, the Fed will buy mortgage-backed debt until the labor
market outlook improves "substantially," and it promised to keep
an accommodative stance for a considerable amount of time even
after the recovery strengthens.
The Fed doesn't want to "make the mistake of retreating at
the first, early signs of improvement" in the economy, Rosengren
The Fed in late 2008 slashed interest rates to near zero and
has since bought $2.3 trillion in long-term securities in an
unprecedented drive to spur growth and revive the economy after
the worst recession in decades.
Yet the recovery, especially in jobs, has been slow and
economic growth stumbled this year, leading the Fed to say it
expects to keep rates at rock bottom at least through mid-2015.
U.S. gross domestic product growth was 1.7 percent in the second
quarter, not enough to put a dent in the unemployment rate,
which was 8.1 percent last month.
Much like Rosengren's benchmark, full employment is
generally seen when the jobless rate is between 5 percent and 6
percent, though some economists think it is higher after the
financial crisis and Great Recession. Rosengren said it will
take "several years" to get there.
Some Fed policymakers have criticized QE3 - which boosted
U.S. stocks and depressed the dollar when it was announced - for
having little chance of spurring job growth and for tempting
inflation. But Rosengren said the risks of allowing the economy
to stagnate outweigh the risks of ramping up asset purchases.
It was time for the Fed to announce "stimulus that will
continue until the U.S. achieves both faster economic growth and
lower unemployment, no matter the unanticipated interruptions,"
The stimulus, which included QE3 and the conditional
mid-2015 rates pledge, should boost the housing market, broadly
lower longer-term rates, and it "should provide market
participants confidence that the Federal Reserve will do what it
takes to improve economic outcomes," Rosengren added.