The Federal Reserve’s efforts to stimulate the US economy by buying billions of dollars of long-term bonds appears to be working, helping to boost home sales, construction, and consumer spending and confidence, said Eric S. Rosengren, president of the Federal Reserve Bank of Boston.
Rosengren, speaking at Babson College in Wellesley Thursday, said the Fed’s actions are producing the expected result—lowering rates on long-term loans such as mortgages, which in turn can encourage consumers and businesses to borrow and spend. The Fed has kept its key short-term rate near zero for nearly four years, and expects to hold it there into 2015.
“The program has so far worked as expected,” Rosengren said. “Our actions are likely to spur faster economic growth than we would have had without this additional stimulus—and, as you know, economic growth has been painfully slow.”
Rosengren was a strong and vocal advocate of the Fed taking additional actions to stimulate the economy and bring down the stubbornly high unemployment rate. The Fed’s bond-buying strategy, however, is unconventional and controversial, with critics arguing the central bank risks sparking a burst of inflation.
Rosengren said in his speech that inflation, running at about 2 percent, remains tame and in check. He used his speech at Babson reiterate his belief that the Fed needs to be aggressive in its actions to improve the economy, which was ravaged by the Great Recession.
The national unemployment rate has been on the decline in recent months, falling from 8.3 percent in July to 7.8 percent in September, according to the US Labor Department. But Rosengren thinks more can be done.
“Given that the current inflation rate is quite low and is expected to stay low for several years, we have the flexibility to push for more improvement in labor markets,” Rosengren said. “We should continue to forcefully pursue asset purchases at least until the national unemployment rate falls below 7.25 percent and then assess the situation.”
Rosengren said, he remains concerned about the so-called fiscal cliff, the steep tax hikes and deep spending cuts that go into effect in January unless Congress reaches a compromise on reducing deficits. That combination would hurt the still weak economy, and possibly push it back into recessions, economists say.