February 26, 2014 / 5:30 PM / 4 years ago

Fed should be 'very patient' in cutting stimulus -Rosengren

BOSTON, Feb 26 (Reuters) - The recent drop in the U.S. unemployment rate overstates the health of the labor market and should not trigger any speedy reduction in the Federal Reserve’s super-easy monetary policy, a top Fed official said on Wednesday.

The high number of part-time workers who would rather work full-time, the still-high unemployment rate, and very low inflation suggest significant “slack” in labor markets and “call for a very patient approach to removing monetary policy accommodation, particularly given the softness in recent economic data,” Boston Federal Reserve Bank President Eric Rosengren said in remarks prepared for delivery to the Boston Economic Club.

The Fed has kept short-term interest rates near zero for more than five years, and bought trillions of dollars of Treasuries and mortgage-backed securities to push down long-term borrowing costs and encourage investment in hiring.

This past December, as signs of an improving labor market began to take hold, Fed policymakers made the decision to begin trimming their massive bond-buying program.

Rosengren dissented, and has since repeatedly voiced his discomfort with removing monetary accommodation while the labor market is weak and wage pressures are practically non-existent.

New Fed Chair Janet Yellen, who will chair her first policy-setting meeting next month, has said she too sees a “great deal of slack” in the labor market.

But she and the majority of Fed officials also have said they support a continued reduction of the Fed’s bond-buying program, which now stands at $65 billion a month.

On Wednesday, Rosengren said that it has been difficult for economists to determine whether weak employment reports for the past two months have been influenced bad weather or if they reflect an economic slowdown, and predicted that harsh winter weather will make the February jobs report similarly difficult to interpret.

“In my view, this uncertainty provides an additional strong rationale for taking a patient approach to removing the monetary policy accommodation that the Federal Reserve has been deploying.”

The Fed has signaled it will keep rates low well after it stops buying bonds, promising to keep short-term interest rates low until well past the time the jobless rate falls to 6.5 percent.

In January, the rate fell to 6.6 percent, but employment gains were far weaker than had been expected.

Indeed, Rosengren said, the U.S. economy will still have significant labor market slack even after the unemployment rate falls the 6.5 percent threshold. Low inflation, running well below the Fed’s 2-percent target, also suggests continued slack in the economy, he said.

“As the unemployment rate falls and approaches the 6.5 percent threshold, the Federal Reserve needs to make an assessment of the degree of remaining labor market slack as it sets monetary policy,” Rosengren said. “It is vitally important that labor markets continue to improve. Monetary policy should continue to be accommodative, supporting a return to full employment, given the very low inflation rates.”

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