BOSTON (MNI) – Boston Federal Reserve President Eric Rosengren
Monday evening said despite supply shocks that are pushing commodity
prices higher, the fact that core inflation remains low means now is not
the time to tighten monetary policy.

In remarks during a panel discussion hosted by the Boston Globe and
University of Massachusetts entitled, “Recession and Recovery: A Forum
on Smart Policies for Sustainable Growth,” Rosengren also argued that
the Fed must not withdraw its monetary accommodation “too quickly.”

On the issue of higher prices, Rosengren defended the Fed’s focus
on core inflation, saying, “The reason we talk about core inflation at
the Fed isn’t because we don’t care about those prices that affect
consumers and affect people in a very substantial way. In fact, our
concern when food and energy prices go up is that the economy will be
weaker than it otherwise would be.”

If oil prices go up fairly significantly, he said, the result is
consumers have to cut back on other expenditures.

“So when some people are advocating a tighter monetary policy as a
result of supply shocks, I would argue that that’s not a policy at this
time — that instead we have to be concerned that core inflation is
still low,” Rosengren argued.

He noted that with an unemployment rate at 8.9%, “we really have an
awful lot of slack in the economy,” and, “Normally when we have this
much slack in the economy, it’s consistent with overall inflation rates
continuing to go down.”

The Federal Reserve is responsible for both inflation and
unemployment, Rosengren continued, and with core inflation at about 1.1%
— “below the 2% that we’re targeting overall — that leaves some
flexibility for the Fed to try and encourage more job growth “than we
otherwise would.”

Rosengren also defended the Fed’s highly accommodative stance
against accusations that it has helped fuel food and energy inflation.
The substantial rise in food and energy prices is mostly due to supply
shocks, he said.

“The Fed is very concerned about those types of supply shocks.
Unfortunately, there’s not much we can do to affect the change in oil
prices or the change of commodity prices,” Rosengren said, adding, “So
whether we tighten or ease policy, it’s not going to have a big impact
on oil prices.”

The Fed official said that what will have a big impact on oil
prices will be the Libya situation resolving itself, and while the Fed
can raise or lower interest rates, “that won’t have a big impact on
wheat prices, either.”

That will require a good harvest in the United States and Russia
and Australia. “So there are certain things we have no control over,”
Rosengren said.

Instead, Rosengren said fiscal and monetary policy have to continue
to think about ways that the “very weak” labor markets can improve.

“And that’s not taking monetary accommodation away too quickly and
not taking fiscal accommodation too quickly,” he warned.

While, the goal in the long run is to achieve fiscal
sustainability, “the first thing we should be doing is trying to get the
slack out of the economy … we need to be careful not to go the
austerity route too quickly,” Rosengren said, citing the example of
Japan in 1997 and the United States during the 1930s.

“It’s not that there isn’t a very serious problem … It’s a
question of when we should do it,” Rosengren concluded. “We want to be
pulling the fiscal accommodation very slowly (until we) get closer to
full employment.”

** Market News International **

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