Perspectives on Quantitative Easing in the United States
Boston Fed President Eric Rosengren today discussed the outlook for the U.S. economy, and also assessed the impact of quantitative easing and other nontraditional policy tools.
On the U.S. economy, Rosengren expects "that economic conditions will continue to gradually improve, which in turn would justify further actions to normalize policy, continuing a gradual return to a more normal interest rate environment."
Federal Open Market Committee minutes suggest three conditions that would make it appropriate to further raise interest rates – a rebound in spending (growth from the first quarter level), continued strengthening of labor markets, and additional progress toward reaching the Federal Reserve's 2 percent inflation target.
Acknowledging that lately the economic data have been "choppy," Rosengren cited the disappointing employment report for May, noting that it will be important to see if the weakness is an anomaly or reflective of a broader slowing in labor markets.
"Despite the weakness in the recent employment report, at 4.7 percent unemployment we are now at my estimate of full employment," Rosengren said. He noted also some evidence of inflation moving toward the 2 percent target.
"I expect that the U.S. central bank will gradually normalize monetary policy as the three conditions set out in the April FOMC minutes are met," he continued.
Rosengren said he was a strong supporter of pursuing quantitative easing in the U.S. during the aftermath of the financial crisis, to provide further stimulus after short-term rates reached essentially zero. He showed how U.S. households and firms have seen lower real rates since the first quantitative easing was implemented.
Rosengren expects that after policy has normalized, a full evaluation of U.S. quantitative easing will suggest that the tool was useful, and therefore appropriate in the future if needed.
"My view is that the positive response of the U.S. economy to quantitative easing is one of the reasons we are now approaching both elements of the Federal Reserve's dual mandate."
Turning to negative interest rates, and in particular Japan's experience, Rosengren noted "much more mixed results" and considers them only a last resort. He does not expect that the U.S. will need to use negative interest rates.
Rosengren was speaking at the Global Interdependence Center’s Central Banking Series in Helsinki, Finland.