The chief of the Federal Reserve Bank of Boston predicts unemployment could drop to 6.5 percent by the end of the year if the pace of economic growth accelerates and the government avoids imposing severe spending cuts.
In a speech Tuesday before the Greater Providence Chamber of Commerce, Boston Fed chief Eric S. Rosengren said the central bank’s policy maintaining low interest rates is helping the economy recover. In particular, it’s driving car and home sales, and spending by consumers on durable goods.
But businesses and households held back in the last quarter of 2012, Rosengren said, mainly due to uncertainty surrounding the fiscal cliff tax debate. While forecasting that economic growth will approach 3 percent by year’s end, he warned that Congress could derail the recovery if it insists on deep budget cuts.
“There is substantial uncertainty over the fate of federal government grants to state and local governments. Substantial cutbacks in these grants would have a ripple effect on the economy,’’ he said in the speech.
Rosengren has been an outspoken proponent of the Fed’s policy of buying up bonds and keeping short-term interest rates near 0 percent, so long as inflation remains below the target 2 percent rate. Over the past year, inflation has run at 1.4 percent, with core inflation -- excluding volatile items like energy and food -- at about 1.5 percent.
Several regional Fed presidents, including Rosengren, have taken the position that the central bank should do more to help grow the economy beyond its current 2.6 percent pace and wrestle unemployment well below its present 7.8 percent level.
By Rosengren’s calculations, the United States would add 2.1 million jobs and drive the jobless rate down to 6.5 percent if construction employment returned to 2004 levels and durable goods manufacturing regained half of the positions lost since 2004.
That’s overly optimistic, according to some. “That’s pretty aggressive,’’ said Nigel Gault, chief US Economist for IHS Global Insight in Lexington. “I’m not quite as optimistic about the effectiveness of Fed policy at this point.”
Gault agreed that fiscal austerity now would pose huge challenges to the economy. He didn’t like seeing the Social Security payroll tax restored all at once, as it recently was, as part of the fiscal cliff tax deal in Congress. And he warned against deep spending cuts: “We don’t need austerity now. We need a credible plan for reducing the deficit.”
Rosengren called the need for a sustainable long-term fiscal policy “both clear and uncontroversial.” But it’s important, he said, to do it “in a way that does not risk the tentative economic improvements we have experienced to date.”
Cuts in the federal government’s spending would likely have an impact on state and local government, Rosengren said, resulting in layoffs of teachers, police and other workers, which also hurts the economy.
IHS is forecasting 3 percent growth by second quarter 2014 -- about six months later than Rosengren. He may be counting on increased spending by businesses and households that kept their cash in their pockets in the last quarter. As the housing market continues to gain strength, encouraging more people to buy property and large-ticket items with low-interest loans, that will help the economy, he said.
Rosengren’s forecast from last January was on target. He anticipated growth between 2 and 3 percent and a “very gradual improvement” in labor markets in 2012.