The US economy will continue to improve over the next year, but at a “painfully slow pace” that will make only a modest dent in unemployment, Eric S. Rosengren, president of the Federal Reserve Bank of Boston said Wednesday.
Rosengren, speaking to a business group in Manchester, N.H., said he expects the national unemployment rate, 7.7 percent in February, to slip to just above 7.5 percent by end on the year. It should decline further to slightly above 6.6 percent by the end of next year, he said.
As a result, Rosengren said, the Federal Reserve should continue its unconventional policies to stimulate the economy until the end of the year.
The Fed has been buying US Treasuries and mortgage-backed securities as a way to lower long-term interest rates to encourage consumers to buy homes and cars, and business to expand and create jobs. Rosengren estimated every $500 billion in bond purchases by Fed creates jobs for about 400,000 workers.
“Actions taken by the Federal Reserve to speed up the pace of the economic recovery seem to be having the desired impact,” Rosengren said in prepared remarks. “Economic forecasters are expecting continued improvements over the next several years.”
But, he added, “Global financial conditions remain fragile. And the economy still has a long way to go before we have full employment.”
Rosengren has been one of the most vocal supporters of the Fed taking aggressive action to stimulate the economy with the aim of bringing down the unemployment rate more quickly. Critics of these policies argue that the Fed risks reigniting inflation and fueling another credit bubble, similar to the one that ultimately led to the recent financial crisis and national recession.
Rosengren said in his speech that inflation still remains low, and there is little evidence that it is accelerating. He acknowledged that continued low-interest rates could threaten financial stability as investors take bigger risks to increase returns, but those risks can be managed with vigilant financial regulation.
“Some observers argue that the beneficial effects are offset by the cost of reduced financial stability,” he said. “However, I see little evidence that our monetary policies are generating significant financial stability problems at this time. Simply put, the benefits of [Fed policies] have exceeded any reasonable estimates of costs.”