The economic recovery is poised to accelerate and lower the unemployment rate, but not so fast that the Federal Reserve should significantly pare back its stimulus programs, the president of the Boston Federal Reserve Bank said Tuesday.
Eric S. Rosengren, speaking at a business conference in Hartford, said despite solid improvements in job creation, unemployment, and overall economic growth recently, the situation remains precarious, if not dire, for too many Americans. Unemployment, at 7 percent nationally, remains about 2 percentage points above what Rosengren and other economists consider full employment, a jobless rate between 5 and 5.5 percent.
Long-term unemployment, he added, remains stubbornly high. Unless the economy grows fast enough to put these people back to work, the nation risks losing the productive capacity of millions of workers as they give up hope of finding jobs and drop out of the labor force.
“Prolonged unemployment can cause longer-lasting damage to individuals if skills atrophy, and also ‘leave marks’ on the labor market and economy more broadly, long after the recovery is complete,’’ Rosengren said in his prepared remarks. “These long-term labor market scars, which result from a very slow recovery, lead me to believe that the Federal Reserve should ... wind down our extraordinary programs only gradually.”
Among Fed policy makers, Rosengren has been one of the strongest supporters of maintaining aggressive stimulus polices, including a bond-buying program aimed at holding down long-term interest rates, such as for mortgages. Rosengren last month dissented from the decision to trim the bond-buying program to $75 billion a month from $85 billion, arguing it’s too soon to begin withdrawing stimulus from the economy.
In his speech, Rosengren acknowledged that the economy is improving and should continue to improve. Job growth in recent months has been strong and the unemployment rate has come down steadily, now 3 points below the recession peak of 10 percent.
Still, the labor market remains still weak, Rosengren said. At least some of the decline in unemployment comes from workers giving up job searches (Only those actively seeking work are counted as unemployed).
In addition, the rate of workers quitting jobs is still below pre-recession levels. In healthier economies, workers quit more readily because they believe they can find better—and better paying—jobs. But, Rosengren said, “With workers concerned about job opportunities, there continues to be a reluctance to leave current employers—despite the fact that real wages for many employees have shown little improvement during this recovery.”
Another concern is an inflation rate that’s too low, Rosengren said. That becomes a problem should a shock hit the economy and depress demand for goods and services, leading to destructive spiral of falling prices, production cuts, and layoffs known as deflation. The Great Depression is perhaps the best known example of deflation.
The Fed’s preferred measure of inflation is running at about 1 percent, half the central bank’s target rate of 2 percent. As a result, Rosengren said, the Fed should maintain aggressive stimulus policies until both inflation and employment move closer to the Fed’s goals.
“As the economy continues to improve, we should reduce and ultimately remove the unusual support that the Federal Reserve’s monetary policy has provided,” Rosengren said. “But this support should only be removed gradually.”