Fed’s Rosengren: More Pessimistic Outlook Vs FOMC Forecasts
–Slow Economic Growth Likely To Continue For ‘Quite Some Time’
–Recent China, U.S. Data Consistent With Economic Growth Slowdown
By Brai Odion-Esene
WASHINGTON (MNI) – Boston Federal Reserve Bank President Eric
Rosengren Monday said he has a more pessimistic outlook for the U.S.
economy compared to the collective “gloomy” forecasts by Fed
policymakers, warning that the current slow pace of growth is likely to
continue “for quite some time.”
In a presentation at the Sasin Bangkok Forum in Thailand, Rosengren
highlighted the adverse impact that high levels of uncertainty — about
the future direction of economy — is having on growth, while also
warning that the increased interconnectedness of the globe means the
world economy remains “quite vulnerable” to financial shocks.
Rosengren also said he does not foresee a rapid resolution to
sovereign debt and banking crises plaguing the euro area.
The pace of global economic growth has eased in the first half of
the year Rosengren said, and “Recent data from both the United States
and China are consistent with a slowdown in economic growth, and it
looks like Europe is in a recession.”
He noted that following its meeting in June, the Fed’s policymaking
Federal Open Market Committee released economic projections indicating
participants’ expectation that growth will be positive “but quite weak.”
The FOMC central tendency of forecasts for real GDP growth was
+1.9% to +2.4%, 8.0% to 8.2% for the unemployment rate, and +1.2% to
+1.7% for PCE inflation.
“Despite this rather gloomy collective forecast, I actually have
been more pessimistic than my colleagues,” Rosengren said. “My forecast
for GDP is below the central tendency, my forecast for unemployment is
above the central tendency, and my forecast for inflation is at the
bottom of the range of the central tendency.”
He will be a voter on the FOMC in 2013.
Rosengren said his pessimism is rooted in an expectation of
weakness in investment, net exports, and government spending, and that
the weakness is driven in part by “concerns about economic and financial
conditions in Europe, combined with restrained state and federal
government spending as the U.S. (like many other countries) grapples
with large budget deficits.”
Coming on the back of a U.S. jobs report that showed the economy
only added 80,000 jobs in June, Rosengren said his conversations with
businesses show a greater unwillingness to hire or invest in capital
until the economic uncertainty is resolved.
In addition, a quick resolution for European sovereign debt
concerns and banking problems “may remain elusive,” he said, and the
same goes for other nations with large deficit problems.
“This suggests that slow growth is likely to continue for quite
some time,” Rosengren warned.
Firms have become more tentative, Rosengren continued, a mindset
that he does not expect will change any time soon.
“Concern over a potentially significant slowdown in the future
reduces current growth,” he said.
Rosengren noted that today’s pace of employment growth in the U.S.
is slower compared to the same point in the previous three recoveries,
and it has slowed “fairly noticeably” in the past three months.
He described the current level of employment as “sobering,” and
reiterated that growing uncertainties about the global economy are
causing firms to postpone hiring decisions.
“The slowdown in employment growth not only hinders our ability to
get to full employment, but also weakens the consumer side of the
economy even more, going forward,” he said.
With regards to the global banking system, Rosengren cautioned that
multinational financial institutions still have the potential to
adversely impact global financial stability and economic outcomes —
through their capacity to rapidly magnify and transmit major financial
shocks across sovereign and continental borders.
And, “given global employment and fiscal challenges, the global
economy remains quite vulnerable to financial shocks,” he said. “While a
large financial shock would impact the global economy, global banks have
the potential to amplify that shock.”
Rosengren added that European stocks were badly impacted by the
financial shock from the U.S. during 2008 crisis. Were there to be a
serious financial shock from Europe, he said, “these correlations
suggest it is quite likely that it would have a large impact on
financial stocks and the broader stock market in the United States.”
Combined with the fact that Asian banks are likely to be more
impacted now should such a significant shock happen in Europe, “it is
particularly important at this time to reduce the probability, and
mitigate the severity, of any potential financial shock,” Rosengren
** MNI Washington Bureau: 202-371-2121 **