Boston Fed’s Rosengren: ‘Most difficult part of the recovery is still ahead of us’

Eric Rosengren, president of the Federal Reserve Bank of BostonAndrew Harrer/Bloomberg

Six months into the coronavirus pandemic, the Massachusetts economy has bounced back faster than expected. But downtown Boston remains a ghost town, and until that changes, a complete recovery will remain out of reach.

That was the sobering assessment Wednesday from Eric Rosengren, president of the Federal Reserve Bank of Boston, who said additional progress will be tough as the country struggles to control the virus and gridlock prevents Congress from providing a much-needed financial shot in the arm.

Rosengren also raised a warning about credit drying up as small and midsize banks are hit by defaults on mortgage and small-business loans, even as he scolded large banks for not participating in an emergency lending program orchestrated by the Boston Fed.

In an interview, Rosengren conceded he is more pessimistic than many of his Fed colleagues. His primary concern: the likelihood that a second wave of COVID-19 infections will trigger new travel restrictions and a retreat in business and consumer confidence. The public will probably remain skittish until there is a vaccine, he said.

A large portion of the state’s white-collar employees continue to work remotely, devastating the businesses that support them in Boston.

“It’s going to be very difficult for Massachusetts to fully recover until Boston fully recovers,” he said. “And a full recovery in Boston requires people to occupy the office buildings we have downtown.”

Earlier Wednesday, in remarks prepared for delivery to the Boston Economic Club, Rosengren said, “I believe the most difficult part of the recovery is still ahead of us."

The Fed upgraded its forecast last week as states continued to reopen and business activity picked up. Officials also adjusted the balance between their primary objectives: using interest rates to maximize employment and keep prices stable. The central bank said it will keep rates near zero until unemployment returns to much lower levels, even if that means letting inflation run above its 2 percent target.

The median estimate among the central bank’s policy makers is for the economy to expand 4 percent in 2021 after a decline of 3.7 percent this year. Unemployment, which dropped to 8.4 percent in August from 10.2 percent in the prior month, is expected to fall to 7.6 percent by the end of 2020. It was 3.5 percent in February, before states began shutting down to stem the spread of the coronavirus.

The Boston Fed chief didn’t offer his own specific forecast but indicated that his outlook is closer to the low end of the range of forecasts released by the Fed last week that called for the economy to stagnate next year and the jobless rate to hover at 8 percent.

Rosengren, who has run the Boston Fed since 2007, has veered from the consensus Fed views in the past. In September and October of last year, he disagreed with two quarter-point interest rate cuts approved by the majority of his colleagues on the Federal Reserve’s policy committee, arguing that rates were already low enough to support the economy.

And his predictions have not always been on target. During 2016, he warned that low rates were creating a bubble in commercial real estate that could burst and drag down the economy. That didn’t happen, though the pandemic is now raising new worries about real estate.

Rosengren pointed to data showing rising vacancy rates and fairly sharp declines in rents in several major cities, including Boston, San Francisco, and Los Angeles, as companies continue to let their employees work remotely.

“The decline in rents is more abrupt than we would normally see in a more traditional (non-pandemic) economic downturn, and may be indicative of more substantial problems on the horizon,” he said in his speech, adding that the pandemic could trigger a surge in the number of bad loans held by banks.

“I am especially worried about a ‘second shoe dropping’ that will particularly affect small and medium-sized banks, which provide a large share of commercial real estate loans and small business loans. A curtailment of credit resulting from such problems has caused serious headwinds to recoveries in the past, and may be a serious problem going forward,” he said.

With the Fed’s benchmark interest rate already near zero, he said, federal stimulus spending would be a more effective way of supporting the economy than monetary policy. He lamented that such relief from Washington “seems increasingly unlikely to materialize anytime soon.”

On the issue of stimulus, Rosengren was in agreement with other Fed officials. On Wednesday, chairman Jerome Powell, vice chairman Richard Clarida, and regional central-bank chiefs Charles Evans and Loretta Mester each said the recovery hinged on more support.

In Congress, lawmakers are consumed with the fight over when to fill the seat on the Supreme Court left empty by the death last week of Justice Ruth Bader Ginsburg. Efforts to pass a new stimulus package have been stalled for months.

Rosengren used his speech to chide big banks for their limited participation in the Fed’s Main Street Lending Program, which the Boston Fed is overseeing.

The program was created to provide as much as $600 billion in loans to small and midsize businesses struggling under the weight of the pandemic, with banks making the loans, collecting a fee, and the Fed assuming 95 percent of the risk. Just $2.4 billion in loans were purchased by the Fed or were under review as of Sept. 21.

Rosengren said, “Relatively few banks have made more than 10 loans and the banks making at least six loans in the Main Street Program have been banks with assets under $20 billion. None of the nation’s largest banks, by this metric, are currently active in the program.”