By Joshua Zumbrun
HARTFORD, Conn. - Federal Reserve Bank of Boston President Eric Rosengren said the central bank could strengthen the U.S. economy by targeting stimulus policies at the housing market and loans to small businesses.
“Further purchases of mortgage-backed securities would in my view help provide a more rapid recovery in housing, by reducing the costs of refinancing or purchasing new homes,” Rosengren said, according to the prepared text of a speech today in Hartford, Connecticut. “Of course, these Fed actions would be even more effective if accompanied by fiscal policies designed to speed the recovery in housing.”
Rosengren also said that “credit availability for creating or expanding small businesses can be quite a challenge” and that “again, monetary policies that push down longer-term rates can be helpful, and that would be particularly true if there could be a targeted approach to improve small-business financing.”
The Boston Fed chief has consistently supported additional action from the Federal Open Market Committee to lower interest rates and help boost an economy that grew at a less than 2 percent annual pace in each of the first three quarters of 2011. The U.S. unemployment rate fell to an almost three-year low of 8.5 percent in December, the Labor Department said Jan. 6.
Rosengren, 54, said the economy also faces “significant downside risks that are likely to make households and businesses cautious.”
“Problems with a slowing European economy, and sovereign and banking issues in Europe, remain downside risks,” he said. “Excessive fiscal austerity here or abroad also has the potential for near-term downside risk” and “recent uncertainty in the Middle East highlights the ever-present risk of potential oil shocks.”
These risks cannot directly be countered by monetary policy, he said, “but they highlight the importance of finding ways to hasten the pace of economic growth and job creation at this point in time.”
In separate remarks Jan. 6, New York Fed President William Dudley called on the U.S. government to try new programs to revive the housing market while saying the central bank may still consider ways to cut interest rates.
“Implementing such policies would improve the economic outlook and make monetary accommodation more effective,” Dudley said today in a speech to bankers in Iselin, New Jersey. At the same time, it’s “appropriate” for the Fed to consider steps to ease monetary policy, he said.
The rate of inflation is likely to fall in 2012, Rosengren said, as energy costs and other closely related prices such as airline fares recede. Wages also remain subdued, he said.
“I see no evidence of significant acceleration in labor costs -- as a result of weakness in labor markets -- and also see reversals in a number of important commodity price increases,” he said. “As a result, I personally expect that inflation is likely to be below 2 percent not only in 2012 but also over the next several years.”
Citing his subdued outlook for inflation and continued high unemployment, Rosengren said “it is important for the Federal Reserve to continue considering ways to promote stronger growth and hasten what is a painfully long, slow recovery and adjustment time in the economy.”
Rosengren said that most officials expect unemployment to reach 5 percent to 6 percent in the longer run.
“We’re currently at 8.5 percent so we’re a long way away from that,” he said in an audience question-and-answer session after the speech. “Ideally we would get back into the 5 to 6 percent range and my own expectation is in the longer run it would be at the lower end of that distribution.”
“We actually need to do a lot more to try to get the unemployment rate down if we’re going to get anywhere close to that,” he said.