Federal Reserve Bank of Boston President Eric Rosengren said monetary stimulus is still needed to bring down an unemployment rate that’s likely to stay close to 9 percent this year.
“Even with a relatively robust recovery, it will take several years before we attain full employment and an inflation rate close to a long-run expectation of 2 percent,” Rosengren said in the text of remarks given in Mashantucket, Connecticut, today. “There has been clear room for — and indeed an imperative for — policy actions like those the Federal Reserve has been pursuing.”
The Federal Open Market Committee last month voted to push ahead with its plan to stimulate the economy by purchasing $600 billion of Treasurys through June in the face of the strongest political backlash in three decades. Politicians such as Representative Ron Paul, a Texas Republican who has advocated abolishing the Fed, have said the central bank’s policies risk an outbreak of inflation.
“The current level of accommodation from monetary and fiscal policy is appropriate,” Rosengren said.
Rosengren said the expansion of bank reserves hasn’t fueled increases in lending, and he expects measures of core inflation, which exclude food and fuel, to remain below 2 percent “over the next several years.” The central bank also has the tools to withdraw reserves from the banking system and prevent a rapid acceleration in prices once the U.S. economy is “closer to normal,” he said.
“Thus the fear that our large balance sheet and the large stock of reserves in the banking system will cause inflation — either now or down the road — seems misplaced to me,” Rosengren said.
The U.S. economy will expand at a 3.5 percent to 4 percent rate during 2011, as it is “increasingly supported by private spending,” Rosengren said. Growth won’t top 4 percent because the housing market’s recovery is likely to be weaker than usual, given the tightening of lending standards and high vacancy rates, according to Rosengren.
“If housing-related growth is not going to boost the recovery this time around, we may need policy — particularly monetary policy — to continue playing a stimulative role,” said Rosengren, who doesn’t vote on monetary policy this year.
Growth of 4 percent would still leave the unemployment rate close to 9 percent at the end of 2011, a level that’s “far above anyone’s estimate of full employment,” Rosengren said.
The jobless rate has held at 9.4 percent or higher since May 2009. Rosengren said it will probably take at least four years to return to full employment.
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