Fed must do more, its Boston chief says
Eric Rosengren, the head of the Federal Reserve Bank of Boston, is issuing an unusual public plea to his colleagues in Washington, urging the nation’s central bankers to ignore election-year pressures and do more to jump-start the muddling economy.
Less than a week after Federal Reserve policy makers elected not to take new steps to stimulate the economy, Rosengren in an interview added his voice to a handful of dissenters, saying the central bank has to act at its next meeting in September to revitalize the economy. The Fed should not worry, he said, if the move is seen as influencing the presidential election.
“We don’t get to pick the timing of a global slowdown,” Rosengren said. “If there’s a slowdown and you have an independent central bank, the appropriate response is to act. I think that’s exactly what we should do.”
Among the actions he wants his colleagues to consider is for the Fed to again drive down interest rates by buying trillions of dollars in securities; in particular, Rosengren wants the Fed to focus on buying mortgage securities to push home loan rates even lower, which would make housing cheaper, boost the real estate market, and free up money for homeowners to spend elsewhere.
Some Fed specialists said the remarks from Rosengren are unusually pointed in a world where even the simplest statements are carefully worded. Tim Duy, an economics professor at the University of Oregon who writes a column called Fedwatch on the website Economist’s View, said he was struck, in particular, by Rosengren’s publicly urging the central bank to ignore the political situation.
“That would be fine to say internally. But to say that externally, to pull back the curtain and say, ‘They’re doing this for the election,’ I think is a shift and reflects his level of frustration,” Duy said.
Rosengren is a respected voice within the Federal Reserve, and in his five years as the head of the Boston branch he has been a vocal supporter of aggressive action on economic problems. He is a nonvoting member of the Federal Open Market Committee, the central bank’s main policy arm, which is chaired by Fed chief Ben Bernanke. Since he won’t be a voting member until next year, Rosengren’s influence for now is restricted to advice and opinion.
One issue is whether action from the Fed could improve the US economy and tip the election in President Obama’s favor. In general, Republicans — including presidential candidate Mitt Romney — want the Fed to sit tight, while Democrats would welcome more stimulus. As an independent central bank, the Fed is supposed to be free from political influence and does not need approval from Congress or the president for its main policy actions.
Opponents of additional Fed action contend that measures such as buying investment securities to pump money into the economy and drive down lending rates, which Rosengren supports, don’t work and would lead to higher inflation.
The Fed committee has said that it would help the economy by keeping its main interest rate near zero through 2014.
While the US economy added 163,000 jobs in July, the nation’s unemployment rate is at a stubbornly high 8.3 percent. Moreover, the rate of growth slowed to 1.5 percent in the second quarter. Despite acknowledging the worsening situation, the Fed committee last week declined to act, other than to say it would “provide additional accommodation as needed.”
Rosengren said the economy is just “treading water” and among the actions the Fed committee should consider is a repeat of what the central bank did during the recession when it spent trillions of dollars buying securities. The bond-buying program was controversial, and critics complained it did not help much. But Rosengren said anything more modest than that would probably not be enough. “It would be hard to come up with a program with a big enough impact” without big purchases of securities, he said.
The point of any Fed plan to buy securities is to keep interest rates down. But rates of all kinds, including on mortgages, are already at rock-bottom lows. Like others, Rosengren believes previous Fed purchases helped the economy and that rates can go even lower and still make a difference for consumers and businesses.
Rosengren sees the economy being held back by two factors. One is Europe’s economic problems and the other is our own “fiscal cliff” at the end of this year, when scheduled increases in federal taxes and deep spending cuts take effect unless Congress reaches a budget compromise.
Both factors, he said, create damaging uncertainty; people and businesses put off decisions to hire workers and spend money.
“Facing a world that’s going to be treading water, monetary policy shouldn’t just stand there and watch it happen,” Rosengren said. “We should start talking about more aggressive policy to make sure we get the kind of growth that’s consistent with improvement in the labor markets.”
His remarks put him in the camp of those who want the Fed to be aggressive and are trying to pressure Bernanke to move from the middle ground. Other dissenters have encouraged the policy committee to be more clear about its long-term objectives: that it will keep interest rates at a certain low level, or allow inflation to climb to particular point until the economy has firmly improved and unemployment comes way down. Those voices include Rosengren’s counterparts at the Fed banks in Chicago and San Francisco.
Duy said Rosengren’s new remarks could be read one of two ways: He has concluded Bernanke has decided not to act and can’t keep quiet about it, or the policy committee “is doing such a wrong thing that I feel I have to come and say what the right thing is.”
Or, Duy said, Rosengren and others may be stepping up their public comments to give Bernanke cover if he decides the Fed must act. “This could be additional support for Ben Bernanke, should he be inclined to move the middle ground to their direction.”