Boston Fed chief predicts solid growth, not enough jobs

Eric S. Rosengren said that the economy will improve but that it could take four years to reach full employment. Eric S. Rosengren said that the economy will improve but that it could take four years to reach full employment.
By Jenifer B. McKim
Globe Staff / January 15, 2011

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The sluggish housing market will weigh on the economy through 2011, slowing the pace of the recovery and helping to keep unemployment high for years, the president of the Federal Reserve Bank of Boston said yesterday.

Eric S. Rosengren said that unlike in earlier recoveries, housing, which has typically rebounded strongly after a recession, will not serve as an economic engine, but instead restrain overall growth. Housing has a bigger impact on the economy than just real estate; lackluster homes sales also mean consumers are not buying furniture and appliances, hiring contractors for renovations, or spending on other housingrelated goods and services.

Rosengren forecast the economy will continue to improve, expanding at a rate of as much as 4 percent, but not fast enough to create jobs to replace the 8 million lost in the recession anytime soon.

As a result, he said, unemployment, which fell to 9.4 percent last month, will slip to only about 9 percent by the end of the year. Rosengren said it could take four years for the economy to reach full employment, which is typically defined as a jobless rate of about 5 percent.

“The real laggard in this economy has been housing,’’ Rosengren said yesterday at the New England Mortgage Expo at the MGM Grand at Foxwoods in Connecticut. “While 4 percent is not terrible, at that rate it will still take a very long time to get back to full employment.’’

Rosengren spoke at a conference hosted by the Connecticut Mortgage Bankers Association and Warren Group, a Boston firm that tracks local real estate. Even though the national recession ended some 18 months ago, the recovery has proceeded fitfully, with lackluster hiring and stubbornly high unemployment.

Rosengren has been one of the leading voices among Fed officials calling for aggressive actions to accelerate the recovery as a way to boost job creation. Yesterday, he again made the case for the Fed to continue its efforts to stimulate growth, which have included slashing its key short-term interest rate to near zero and launching a program to buy $600 billion in government bonds to lower long-term rates, such as for mortgages.

Rosengren yesterday argued that inflation, still near historical lows by many measures, is so subdued that it probably will not become a problem anytime soon, particularly with high unemployment tempering demand.

“If housing-related growth is not going to boost the recovery this time around,’’ Rosengren said, “we need policy — particularly monetary policy — to continue playing a stimulative role.’’

Rosengren said housing in many areas of the country probably will not recover soon because of the high number of foreclosures and vacancies. Tighter lending requirements also have prevented many people from taking advantage of historically low interest rates to purchase new homes, further hurting the housing recovery.

Brian A. Bethune, a US economist with IHS Global Insight in Lexington, said Rosengren was pushing the Fed’s argument that more has to be done to stimulate the economy. “The housing market is absent, in that situation you can’t have a strong recovery,’’ he said. “Clearly the Fed is concerned about housing and is attempting to provide some general support to that sector.’’

The Massachusetts economy and housing market have fared better than the United States as a whole. The state jobless rate, at 8.2 percent, is significantly lower than the 9.4 percent national rate. Boston-area housing values have dropped about 20 percent since 2005, but have crept up over the last two years. Many other areas of the country suffered declines of 30 percent or more.

“We are doing a bit better here in Massachusetts because we did not have the calamity of a massive burst housing bubble as in states like Nevada, Florida, and California,’’ said Barry Bluestone, dean of the School of Public Policy and Urban Affairs at Northeastern University.

Nonetheless, the state probably will mirror US growth levels this year, according to the New England Economic Partnership, a Walpole nonprofit that makes local economic forecasts. Alan Clayton-Matthews, professor of public policy at Northeastern, said the state economy expanded quickly last year, but downshifted recently, in part because of the lackluster national recovery.

“We had a burst of growth but now growth is slowing,’’ said Clayton-Matthews, a forecaster for the economic partnership.

Once the national recovery accelerates, Rosengren said, Fed policy makers should be able to withdraw stimulus before it sparks inflation.

“There will be a time when these aggressive actions need to be reversed, but first we need to get the economy on a much more solid footing,’’ he said. “Even with a relatively robust recovery, it will take several years before we attain full employment.’’

Jenifer B. McKim can be reached at