By Denny Gulino and Jerry Kronenberg
BOSTON (MNI) – QE3 is battling, as intended, the threat of decades
of a “Great Stagnation,” accelerating recovery but still in need of
reinforcing fiscal policy, Boston Federal Reserve Bank President Eric
Rosengren said Thursday.
In an extended defense of the Fed’s latest unconventional policy
stimulus, Rosengren framed the effort as the Fed’s refusal to accept
high unemployment and low resource utilization as the status quo.
The FOMC’s “forceful” actions, an example to “policymakers of all
sorts,” are in contrast, he said, to Japan’s “muted” response that
helped prolong that country’s stagnation into two decades.
“I would note that over the course of this year there has been no
meaningful improvement in the unacceptably high level of the U.S.
unemployment rate,” Rosengren said in remarks prepared for the
South Shore Chamber of Commerce.
The Fed, he said, is fighting any tendency to tolerate “a long
episode that generally includes a willingness among policymakers to
accept as inevitable, and decline to resist, far-less-than-optimal
The absence of a vigorous response would have “the potential result
that high unemployment could become entrenched as a more permanent
feature of the economic landscape,” he continued.
“The U.S.,” he said, “has seen a series of ‘false starts’ during
this recovery,” natural and manmade disasters that have interrupted
improvement. “As a consequence of these interruptions, the recovery has
been painfully slow by historical standards — resulting in our current
highly-elevated unemployment rate and an inflation rate below our
objective,” he said.
Using a series of charts, Rosengren illustrated the continuing
damage inflicted by the crisis and its sputtering aftermath of
unrealized economic therapy. His portrayal advanced into the present,
where the initial effects of QE3 show, he said, that it is on track.
“I would say in sum that regardless of the event window chosen,
stock prices are up substantially, mortgage rates are lower, and
exchange rates are lower,” Rosengren said, depicting a variety of
indicators from the time of the FOMC’s latest announcement.
“I would point out that our efforts to lower long rates are focused
on stimulating domestic demand, but at the same time lower long-term
rates affect demand for U.S. assets, resulting in a modest change in the
exchange rate — and this is likely to provide some support for
export-oriented industries,” he said.
“All of these impacts are very consistent with what we would expect
of the monetary transmission ‘channels’ of purchasing mortgage-backed
securities and providing additional forward guidance on policy,” he
“In fact, they are also quite consistent with the transmission
channel that we expect when conducting “normal” — i.e. federal funds
rate — monetary policy when we are not constrained by the zero lower
bound,” he said.
“The actions taken by the Federal Reserve last week provide
significant additional support to the economic recovery,” he went on.
“They should result in stronger economic growth, and return us to full
employment more quickly than would be the case absent the policies.”
However, “Appropriate fiscal policies domestically, and improvement
in the global economy could both provide significant positive effects,
and shorten the time needed for unconventional monetary policy actions
like those we have announced.” He warned, “significant fiscal policy
mistakes, such as an unlikely failure to address the looming “fiscal
cliff” in the U.S., would have effects on economic growth that would be
difficult to fully offset with monetary policy.”
Rosengren cautioned that even if QE3 would continue to work as
envisioned, it will take several years to return the United States to
full employment. Echoing Chairman Ben Bernanke, he said monetary policy
cannot be a “panacea” and he repeated fiscal policy support is needed
“It is my firm belief that the monetary policy actions taken last
week should contribute to a faster economic recovery and a more rapid
improvement in labor markets than we would have seen in their absence,”
he said. “However, I want to be careful not to appear to promise too
much, as there are limits to the effects of monetary policy.”
“A very challenging economic climate confronts us all, but I am
very pleased that monetary policymakers in the U.S. are proving willing
to take difficult actions like these rather than accept the possibility
of a long, slow recovery turning into a stagnation that someday earns
the dubious title of ‘Great’,” Rosengren concluded.
“Japan’s experience is a sobering real-world reminder of why
forceful and timely action is appropriate,” Rosengren said.
** MNI **