The US economy will continue to improve over the next year, but at a “painfully slow pace” that will make only a modest dent in unemployment, Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said Wednesday.
Rosengren, speaking to a business group in Manchester, N.H., said he expects the national unemployment rate, at 7.7 percent in February, to decrease to just above 7.5 percent by the end of the year. It should decline further to slightly above 6.6 percent by the end of next year, he said.
As a result, Rosengren said, the Federal Reserve should continue its unconventional policies to stimulate the economy until the end of the year.
The Fed has been buying US Treasuries and mortgage-backed securities as a way to lower long-term interest rates to encourage consumers to buy homes and cars and businesses to expand and create jobs. Rosengren estimated that every $500 billion in bond purchases by the Fed creates jobs for about 400,000 workers.
“Actions taken by the Federal Reserve to speed up the pace of the economic recovery seem to be having the desired impact,” Rosengren said in prepared remarks. “Economic forecasters are expecting continued improvements over the next several years.”
But, he added, “Global financial conditions remain fragile. And the economy still has a long way to go before we have full employment.”
The Fed has set a target unemployment rate of 6.5 percent before it starts to let interest rates rise. Critics of this argue the central bank risks reigniting inflation and fueling another credit bubble, similar to the one that led to the most recent financial crisis. Wednesday night, all three Republican candidates for the state’s open Senate seat said they would not support reappointing Fed Chairman Ben Bernanke when his term expires in 2014.
Rosengren, one of the most vocal supporters of the Fed’s taking aggressive action to stimulate the economy, with the goal of lowering the unemployment rate, said inflation remains far below the Fed’s target rate of 2 percent and there is little evidence it is accelerating.
Rosengren also said the Fed’s actions to keep interest rates low have helped the economy withstand government cutbacks in spending, offsetting the losses in jobs and economic activity with improving home and auto sales. Both industries are sensitive to interest rates.
He acknowledged that low interest rates could threaten financial stability as investors take bigger risks to increase their returns, but that those risks can be managed with vigilant financial regulation.
“Some observers argue that the beneficial effects are offset by the cost of reduced financial stability,” he said. “However, I see little evidence that our monetary policies are generating significant financial stability problems at this time. Simply put, the benefits of [Fed policies] have exceeded any reasonable estimates of costs.”
Rosengren acknowledged concerns that the Fed’s policies are pushing share prices up substantially. The Dow Jones industrial average has reached a record high. But Rosengren noted that the rally is rooted in fundamentals, namely strong earnings. Ratios between share increases and operating earnings remain “well below” the 20-year average, he said.
Another concern is that a rapid increase in home prices, driven by record-low mortgage rates, could lead to a repeat of the recent housing market collapse. Although housing prices have risen significantly in some places, such as Boston, Rosengren said, they remain well below their peak.
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