The Economic Outlook and Monetary Policymaking
In a speech today in Vermont, Boston Fed President Eric Rosengren described why he strongly and unequivocally supported continuation of the Fed's asset purchase program at the last policy meeting.
"Policy actions of the central bank should be rooted in and dependent on incoming data," said Rosengren. The data the Fed's policymaking committee saw in September "did not show the progress I had hoped," he said. The economy seems to be in a "holding pattern - just treading water rather than gearing up to make significant improvement in the still very elevated unemployment rate."
Rosengren cited factors like tepid growth in payroll employment, the declining labor participation rate, sluggish consumer spending, and only modest GDP growth. In addition to the disappointing economic data, he noted the possibility of disruptions in the nation's fiscal policies and the recent rise in long-term market rates.
All this led Rosengren to believe "it would have been premature to begin reducing the rate of Fed asset purchases." Premature reduction in monetary policy accommodation, he added, "risks slowing the sectors of the economy that have shown the greatest strength - the interest-sensitive sectors."
Commenting on the recent public debate over Fed communications, Rosengren said that "Fed actions are not determined by Wall Street's expectations of what we might or should do" but rather by goals like Main Street's return to full employment, and appropriate levels of inflation.
Rosengren also emphasized that policy that is dependent on incoming data cannot always be "signaled" clearly, in advance. "Reality doesn't always live up to our forecasts. Had U.S. fiscal matters not been so problematic, and incoming data on real GDP and employment stronger, it may well have been appropriate to take some action in September. Unfortunately, those were not the facts we faced."
Despite the communications challenges, policymaking that leans on actual data "is far preferable to the alternatives," said Rosengren.
Looking ahead, Rosengren said "If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years - and that should only occur when the data ratify our forecast for an improvement in real GDP and employment." He stressed that "We should seek to get the economy on a path to achieve both elements of the Fed's dual mandate - employment and inflation - as soon as possible."
X Footnote 1
See the September 13, 2012 FOMC statement available at http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm
X Footnote 2
After our program to extend the average maturity of our holdings of Treasury securities was completed at the end of 2012. See the FOMC statement from the December 12, 2012 meeting, available at http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm.
Footnote X 3
X Footnote 4
Discount Window loans and liquidity facility lending are included in "other assets" on the chart.
X Footnote 5
See my remarks on April 12 (available at http://www.bostonfed.org/news/speeches/rosengren/2013/041213/index.htm), in particular the discussion around Figure 1.