The Federal Reserve is taking necessary new steps to stimulate the US economy and should not stop before seeing evidence of a sustainable recovery, the president of the Federal Reserve Bank of Boston said Thursday.
Boston Fed president Eric Rosengren applauded a Sept. 13 decision by the Federal Reserve’s monetary policy-setting committing to take new action to keep interest rates very low. Prior to the Fed’s decision Rosengren had been among the most outspoken voices for such action, aimed at kick-starting a stagnant economy.
“It was time for the Fed to announce stimulus that will continue until the US achieves both faster economic growth and lower unemployment,” Rosengren said in prepared remarks to be delivered to the South Shore Chamber of Commerce in Quincy.
“The risks involved in pursuing these policies are considerably smaller and more manageable than the risk of allowing the economy to stagnate for another year or more,” he said.
The Fed committee voted last week to renew an open-ended policy of purchasing bonds in an effort to keep longer-term interest rates low. The Fed will buy $40 billion of mortgage-backed bonds each month for the foreseeable future.
The central bank also said shorter-term interest rates that it controls would remain at rock-bottom levels, between 0 and 0.25 percent, until mid-2015.
Critics of the plan, the Fed’s third effort to stimulate the economy in recent years, complain it will delivery little economic benefit while risk driving up inflation in the future. Republicans also criticized the Fed for intervening in the economy in order to benefit President Obama two months before the election.
Rosengren said the Fed plan was the right strategy to combat the threat of a “great stagnation,” a prolonged period of economic drift. He said the plan can help spur activity in the residential real estate market, which has shown recent signs of improvement, and blunt the threat of “labor market scarring” in which long-term joblessness becomes ingrained in the market.
Rosengren, who once studied the Japanese banking crisis and subsequent economic malaise as an economic researcher, said the Fed is correct to take a much more aggressive approach toward the US economy.
“A key difference is that we didn’t hesitate, by years, to take significant actions in the US,” he said. “And when we took actions, they were forceful. Going forward, we also don’t want to make the mistake of retreating at the first, early signs of improvement. Japan’s experience suggests one must continue until improvement is sustainable and will persist”