Boston Fed’s Rosengren discusses central bank stimulus, fiscal shocks


In an interview with The Washington Post, Boston Fed President Eric S. Rosengren said the central bank can mitigate — but not offset — the consequences of a fiscal shock from Washington. (Fred Beckham/AP)
October 3, 2013

A top Federal Reserve official warned Wednesday that the central bank can mitigate — but not offset — the consequences of a fiscal shock from Washington.

In an interview with The Washington Post, Boston Fed President Eric S. Rosengren said he strongly supports the central bank’s decision last month to keep pumping money into the economy. But he did not expect that lawmakers would shut down the federal government two weeks later, and he cautioned that failing to raise the nation’s debt limit would cause even more volatility.

“It’s very unpredictable what would happen if we did breach the debt ceiling and weren’t able to get an agreement,” said Rosengren, who this year is a voting member of the Fed’s influential policy-setting committee. “We’re doing what we can, but ideally we would have a fiscal policy that’s aligned with monetary policy.”

The Fed has been buying $85 billion in bonds every month to push down long-term interest rates and encourage consumers and businesses to spend. The effort has helped invigorate auto and home sales, which in turn create jobs and boost the recovery. This summer, officials broached the possibility of scaling back those purchases later this year if the economy strengthened, as the Fed and many private forecasters had been predicting.

Instead, the opposite occurred. The prospect that the Fed would pull back on its stimulus spooked the markets, sending interest rates up and potentially slowing the rebound in the housing market. The unemployment rate has been falling primarily not because people are finding jobs, but because the workforce is shrinking and people are giving up looking for work. The risks of new fiscal drag have become reality.

“The economic data didn’t come in as strong as I would have hoped,” Rosengren said. “We’ve had a forecast of improvement, but we haven’t seen it in the data when we get out a couple of quarters.”

Rosengren said his suggestion a year ago that the Fed begin tapering its stimulus once the unemployment rate dropped to 7.25 percent was intended to push back against predictions of a quick exit. But he noted at the time that the jobless rate could fall for the wrong reasons. The central bank’s decision to stay the course in September, he said, was not a close call for him.

“The caveats actually are important,” Rosengren said Wednesday. “We have to care about the overall economy, not just that one data point.”

The Fed has said that it could even increase the size of its stimulus program if the recovery stumbles. On Wednesday, Rosengren also said the central bank could tinker with its commitment to keeping short-term interest rates low to try to increase support for the economy.

“We should think about what other tools are at our disposal to possibly keep interest rates lower,” he said.

Several other Fed officials have raised the prospect of making an explicit promise to keep rates low until inflation rises above a minimum level. The central bank already has said it will not raise rates as long as inflation is below 2.5 percent or the unemployment rate is above 6.5 percent.

“I think we’d have to think carefully about exactly how it would be formulated,” Rosengren said. “I think it’s certainly worth discussing. “

Rosengren addressed business leaders in Vermont on Wednesday, part of a parade of speeches by top Fed officials in the weeks since the policy committee’s September meeting. The public comments are part of a new philosophy of openness that Fed Chairman Ben S. Bernanke has encouraged. Some critics have said the multitude of Fed voices has confused investors and the public, but on Wednesday, Rosengren defended the new effort at transparency.

“There is an active debate, and we do think through all the possible options and carefully sift through the data,” he said. “The ability to raise different viewpoints and then come to the consensus is, I think, a very valuable aspect of the Federal Reserve.”

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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