THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

Boston Fed chief casts lone dissenting vote on rate cut

Email|Print| Text size + By Robert Gavin
Globe Staff / December 11, 2007

Eric Rosengren spent most of his career in the background at the Boston Federal Reserve, quietly conducting economic research and running the banks regulatory and credit operations. This afternoon, the recently appointed Boston Fed president stepped to the forefront in a big way.

Participating in just his fourth rate-setting meeting at the Federal Reserve in Washington, Rosengren cast the lone dissent, favoring a half-point cut in the key Fed interest rate over the quarter-point reduction policy makers approved. In doing so, Rosengren reflected the sentiment of many analysts that the economy, slowing rapidly under the pressure of housing and credit woes, needs stronger medicine to skirt a recession, economists said.

"Rosengren is very new, and it's surprising that he stuck out his neck,'' said Ian Shepherdson, chief US economist at High Frequency Economics, a forecasting firm in Valhalla, N.Y. "It was the right thing to do, and I'm disappointed he didn't get his way." Investors were disappointed, too. The Dow Jones industrial average plunged nearly 300 points, or 2 percent.

Dissents at the Fed's rate-setting Open Market Committee are unusual, although they've happened more frequently under Chairman Ben Bernanke that his predecessor, Alan Greenspan, economists said. A member of the committee has dissented in six of the 15 meetings Bernanke has led. In October, Kansas City Federal Reserve Bank President Thomas M. Hoenig favored leaving the benchmark rate unchanged, instead of cutting a quarter point cut, as the panel approved.

The Fed uses interest rates to manage the economy, raising them to slow the economy when inflation threatens, and cutting them to stimulate activity when recession threatens. Bernanke and other members of the open market committee don't comment on interest rate decisions and Rosengren, through a spokesman, declined comment.

In some ways, the contradictory dissents at the last two meetings represent the difficulties of gauging the impact of the meltdown in the US housing and mortgage markets, and the credit tightening that has followed.

Some believe the economy, which grew at a strong 4.9 percent annual rate in the last quarter, has momentum to weather the this credit crunch with moderate stimulus and more aggressive moves risk igniting inflation.

Others believe the credit crunch is pushing the economy near recession and the Fed needs to act boldly to ensure lenders keep lending and investors investing.

Rosengren, 50, became Boston Fed president in July, and took a seat on the Federal Open Market Committee at its August meeting. The seven Federal Reserve governors and the president of the New York Fed have permanent seats. Four seats rotate among the other 11 Fed bank presidents.

Analysts said Rosengren's dissent was likely informed by research done at the Boston Fed that showed falling home prices, rather than rising interest rates, drive the surge in foreclosures. Falling home prices make it impossible for people with unaffordable loans to sell their homes, the research says, forcing them into foreclosure. It also broadens the pool of people who view their payments as unaffordable, because of the diminished prospect for a return on the investment "The Boston Fed's research says the key driver is housing prices," said Brian Bethune, US economist at Global Insight, "and unless you can stop the hemorrhaging of housing prices, you're not going to see the foreclosure rate improve." Lower interest rates can boost the economy and home sales, and help stabilize prices, economists said.

Rosengren, who joined the Boston Fed as an economist in 1985, also studied the economic impact of a credit crunch during the New England real estate and banking collapse of the late 1980s and early 1990s.

At the time, said Richard Syron, then the Boston Fed president, Rosengren's research found the credit crunch caused by bank shutdowns by federal regulators was hurting the broader economy. Such a view was considered "counter culture", Syron said, because established economic thought suggested new banks and lenders would simply emerge to replace those that were shut down.

"That's good in the long term," Syron said, "but a lot of people get killed in the long short-term" Syron said that Rosengren's work ultimately convinced federal regulators that, in determining whether to shut down banks, they needed to consider how the loss of available credit would hurt businesses, hiring, and investment. Syron, now chief executive of Freddie Mac, the government-created mortgage financing company, said the experience may have influenced Rosengren's vote.

"To dissent in one of your first meetings is courageous," Syron said.

"But if you've been through a credit crunch, it's a pretty searing experience."

Robert Gavin can be reached at rgavin@globe.com. Binyamin Appelbaum of the Globe staff contributed to this report.

more stories like this

  • Email
  • Email
  • Print
  • Print
  • Single page
  • Single page
  • Reprints
  • Reprints
  • Share
  • Share
  • Comment
  • Comment
 
  • Share on DiggShare on Digg
  • Tag with Del.icio.us Save this article
  • powered by Del.icio.us
Your Name Your e-mail address (for return address purposes) E-mail address of recipients (separate multiple addresses with commas) Name and both e-mail fields are required.
Message (optional)
Disclaimer: Boston.com does not share this information or keep it permanently, as it is for the sole purpose of sending this one time e-mail.