–Fed Actions Likely To Reduce Unemp Rate, Further Risk Of Disinflation
–Expects QE2 To Be ‘Broadly’ Effective, Helpful To Econ Going Forward
–Fed Policy Not To Cause Dollar Depreciation
–Output Decline In Some European Countries Is ‘Striking’
By Brai Odion-Esene
WASHINGTON (MNI) – Another Federal Reserve official entered the
post-QE2 announcement fray Wednesday morning, with Boston Federal
Reserve President Eric Rosengren arguing that the decision to go ahead
with additional purchases of U.S. Treasury securities is “strongly”
consistent with the Fed’s dual mandate.
“Given the state of the economy, a monetary contraction right now
is both unintended and undesirable,” Rosengren said.
Since the Federal Open Market Committee announced its controversial
action November 3 to buy an additional $600 billion in longer-term
government debt, Fed officials — Chairman Bernanke included — have
publicly split into two camps; those that maintain the program is
necessary, and those that remain skeptical regarding its efficacy.
In remarks prepared for the Greater Providence Chamber in
Providence, Rhode Island, the Boston Fed chief made his support for the
program clear, declaring that “the asset-purchase policy announced at
the November FOMC meeting was in my view strongly consistent with our
dual mandate from Congress — in other words, the pursuit of maximum
sustainable employment and stable prices.”
Currently, unemployment is close to double the mandate-consistent
target, and inflation is about half of what the FOMC considers
consistent with price stability, Rosengren said.
He argued that with both employment and inflation falling short of
the long-run expectations that reflect the Fed’s mandate, “one would
expect additional accommodative monetary policy.”
Rosengren noted that, in the long-run, most members of the Federal
Open Market Committee expect inflation to settle close to 2% and that
the unemployment rate is likely to settle between 5% and 6%. “Obviously
the national economy is quite some distance from those long-run
targets,” he said.
The cost of having high unemployment rates for an extended period
of time, or likewise further disinflation, Rosengren warned, could be
quite high and potentially very damaging.
And the argument against further monetary easing is not helped by
recent economic data, he continued, noting that GDP grew by only 2% in
the third quarter. Even less encouraging is the fact that final sales —
a better measure of demand, Rosengren said, since it excludes inventory
investment from the GDP number — “was quite anemic in the third
quarter,” and has been falling over the past four quarters.
Other countries have experienced an even more severe decline in
output, he said and for some it is not clear they have reached their
recession trough as yet. Highlighting Europe, where some countries have
had sovereign debt problems and significant fiscal austerity, Rosengren
said “the output decline is striking.”
“Not changing policy risked further disinflation, a rise in the
real cost of funds tantamount to monetary tightening, and risks of
continued and possibly worsening pain in labor markets,” Rosengren said.
Rosengren centered his argument around the fact that if short-term
interest rates are fixed at about the zero bound, but the inflation rate
declines, then the real interest rate actually increases, amounting to
monetary tightening.
“So we want to prevent any further disinflation — not only because
it gets us closer to a harmful deflationary situation, but also because
it represents a monetary tightening when conditions are indicating that
further accommodation is desirable,” he said.
With regards to employment, Rosengren said the Boston Fed estimates
that QE2 will result in a reduction in the unemployment rate by the end
of 2012 by a little less than half a percent. “This would translate into
more than 700,000 additional jobs that we would not have had in the
absence of this monetary policy action,” he said.
As for those that view large-scale asset purchases as an
unconventional tool of monetary policy, Rosengren countered that they
are much closer to traditional policy than many commentators assume,
with the Fed simply moving in other markets than the federal funds
market.
And Rosengren believes these policy actions, just like slashing the
fed funds rate, “have basically had the expected effects and — despite
some short-run volatility as we get under way — should be broadly
effective and helpful to the economy going forward.”
“I am certain that our purchases over time will contribute to lower
rates than we would otherwise be seeing,” he added.
Responding to accusations that the Fed’s actions are currency
manipulation under a different guise, Rosengren said that is not the
FOMC’s goal, and that in the U.S. — just like any country with a
flexible exchange rate system — a “modest” currency depreciation is the
normal consequence of easing monetary policy.
In fact, he added, “the data show that the Federal Reserve’s
current monetary accommodation to date has merely helped restore the
dollar exchange rate to the level it was three years ago.”
That is not to say there are no risks from the Fed’s actions,
Rosengren said, but he is very confident that they can be managed and
are worth taking.
This confidence also extends to the central bank’s ability to
withdraw the monetary stimulus when the time comes, with Rosengren
saying he is “very confident of the Fed’s ability and will to exit, when
necessary.”
And just like Atlanta Fed President Dennis Lockhart warned Tuesday
night, Rosengren acknowledged there is a risk is that Fed might be too
successful in raising inflation. Guarding against this will require
making it clear in any policy action that the Fed’s desire is to
maintain well-anchored inflation expectations.
And the Fed is not trying to monetize the federal debt, he added,
as the asset purchase program is a policy designed to help reduce longer
term rates over a fixed period of time, “not finance government debt
indefinitely.”
Rather, these actions are likely to reduce the unemployment rate
and reduce the risk of further disinflation relative to not taking
action, Rosengren concluded. “This is exactly what I hoped would be the
result of the program.”
** Market News International Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MN$FX$]
