Monetary Policy and Forward Guidance
In a speech at Husson University in Bangor, Maine, Federal Reserve Bank of Boston President Eric Rosengren advanced his view that monetary policy should remain highly accommodative until the economy is on more solid footing. He also explored the Fed's "forward guidance" challenges, and whether certain economic behaviors will return to pre-crisis norms.
Recent incoming data continue to be consistent with a slowly improving economy, said Rosengren. This improvement is allowing the Federal Reserve to slowly pare back asset purchases and to be less precise in its forward guidance. However, he believes the policy-setting Federal Open Market Committee (FOMC) should be cautious and patient before returning monetary policy to a more normal, less accommodative stance.
"It has been more than six years since the beginning of the last recession, and yet we still have a national unemployment rate of 6.7 percent, and the PCE inflation rate is less than 1 percent," said Rosengren.
"And, actually, the widely reported unemployment rate understates the severity of the problem." The broader labor-market indicators that include workers who are "part time for economic reasons" and workers who have looked for a job in the past year but not in the past four weeks - "marginally attached" workers - remain unusually elevated by historical standards, he pointed out.
A variety of economic data have behaved differently since the recession. It is possible that previous patterns will be re-established as the economy normalizes, or that "'scarring' from the recession may have longer-lasting impacts if households, firms, and labor markets persist in behaving in ways that differ from historical patterns," Rosengren said. "This uncertainty makes it particularly difficult to predict exactly what 'normal' will look like - and why specific forward guidance in monetary policy becomes difficult as the economy gradually improves."
At the March FOMC meeting, the Committee adjusted forward guidance and suggested they would hold shortterm rates at very low levels "for a considerable time after the asset purchase program ends…"
Laying out a possible evolution of forward guidance, Rosengren said "my personal view is that, ideally, forward guidance should, for the time being, remain qualitative but increasingly be linked to progress in achieving our dual mandate, based on incoming economic data." He added, "I believe the FOMC's forward guidance should be consistent with keeping interest rates at their very low level until we are within one year of reaching full employment and our 2 percent inflation target - and the guidance could explicitly state that intention."
Rosengren said he would like to see "a more productive state of affairs", where market participants are more attentive to the incoming data and how the data fit (or do not fit) with the expectations in the forward guidance - are "focused more on data and less on changes in the setting of monetary policy tools."