Citing the lasting scars of the recession, Eric S. Rosengren, president of the Federal Reserve Bank of Boston, on Tuesday called on policy makers to remain “cautious and patient” as they phase out stimulus polices that have supported the economic recovery.
Although the economy has improved, the national unemployment rate of 6.7 percent and low inflation of around 1 percent are “far from normal” economic conditions, Rosengren said in a speech at Husson College in Bangor, Maine.
“I would suggest the uncertainty is heightened just now in part due to the very real possibility that typical economic patterns have been altered by the financial crisis and Great Recession,” Rosengren said.
The Federal Reserve isdialing back its stimulus campaign, gradually reducing its monthly bond purchases aimed at lowering long-term interest rates. The Fed has cut those monthly bond purchases, initially $85 billion, by $10 billion at each of its last three policy meetings, including the most recent one in March. Officials also announced in March that the Fed will hold its benchmark short-term interest rates near zero.
Rosengren said Tuesday that he would like Fed policy makers to hold interest rates very low until the economy is within one year of reaching 5.2 percent unemployment, a level which many economists consider full employment, and 2 percent inflation. Policy makers are concerned that inflation of about half that target rate is too low, making the economy vulnerable to deflation, the destructive cycle of falling prices, wages, and employment.
Businesses and households may have scars from the recession that have led them to continue to stockpile more cash than under normal conditions, Rosengren said, possibly slowing the spending that drives the US economy.
Similarly, he said, a difficult job market has caused many young people to move home with their parents, which has probably contributed to slow levels of new household formation more than six years since the start of the recession.Megan Woolhouse
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