BOSTON - QE3 is battling, as intended, the threat of decades of a "Great Stagnation," accelerating recovery but still in need of reinforcing fiscal policy, Boston Federal Reserve Bank President Eric Rosengren said Thursday.
In an extended defense of the Fed's latest unconventional policy stimulus, Rosengren framed the effort as the Fed's refusal to accept high unemployment and low resource utilization as the status quo.
The FOMC's "forceful" actions, an example to "policymakers of all sorts," are in contrast, he said, to Japan's "muted" response that helped prolong that country's stagnation into two decades.
"I would note that over the course of this year there has been no meaningful improvement in the unacceptably high level of the U.S. unemployment rate," Rosengren said in remarks prepared for the South Shore Chamber of Commerce.
The Fed, he said, is fighting any tendency to tolerate "a long episode that generally includes a willingness among policymakers to accept as inevitable, and decline to resist, far-less-than-optimal outcomes."
The absence of a vigorous response would have "the potential result that high unemployment could become entrenched as a more permanent feature of the economic landscape," he continued.
"The U.S.," he said, "has seen a series of 'false starts' during this recovery," natural and manmade disasters that have interrupted improvement. "As a consequence of these interruptions, the recovery has been painfully slow by historical standards -- resulting in our current highly-elevated unemployment rate and an inflation rate below our objective," he said.
Using a series of charts, Rosengren illustrated the continuing damage inflicted by the crisis and its sputtering aftermath of unrealized economic therapy. His portrayal advanced into the present, where the initial effects of QE3 show, he said, that it is on track.
"I would say in sum that regardless of the event window chosen, stock prices are up substantially, mortgage rates are lower, and exchange rates are lower," Rosengren said, depicting a variety of indicators from the time of the FOMC's latest announcement.
"I would point out that our efforts to lower long rates are focused on stimulating domestic demand, but at the same time lower long-term rates affect demand for U.S. assets, resulting in a modest change in the exchange rate -- and this is likely to provide some support for export-oriented industries," he said.
"All of these impacts are very consistent with what we would expect of the monetary transmission 'channels' of purchasing mortgage-backed securities and providing additional forward guidance on policy," he said.
"In fact, they are also quite consistent with the transmission channel that we expect when conducting "normal" -- i.e. federal funds rate -- monetary policy when we are not constrained by the zero lower bound," he said.
"The actions taken by the Federal Reserve last week provide significant additional support to the economic recovery," he went on. "They should result in stronger economic growth, and return us to full employment more quickly than would be the case absent the policies."
However, "Appropriate fiscal policies domestically, and improvement in the global economy could both provide significant positive effects, and shorten the time needed for unconventional monetary policy actions like those we have announced." He warned, "significant fiscal policy mistakes, such as an unlikely failure to address the looming "fiscal cliff" in the U.S., would have effects on economic growth that would be difficult to fully offset with monetary policy."
Rosengren cautioned that even if QE3 would continue to work as envisioned, it will take several years to return the United States to full employment. Echoing Chairman Ben Bernanke, he said monetary policy cannot be a "panacea" and he repeated fiscal policy support is needed from Congress.
"It is my firm belief that the monetary policy actions taken last week should contribute to a faster economic recovery and a more rapid improvement in labor markets than we would have seen in their absence," he said. "However, I want to be careful not to appear to promise too much, as there are limits to the effects of monetary policy."
"A very challenging economic climate confronts us all, but I am very pleased that monetary policymakers in the U.S. are proving willing to take difficult actions like these rather than accept the possibility of a long, slow recovery turning into a stagnation that someday earns the dubious title of 'Great'," Rosengren concluded.
"Japan's experience is a sobering real-world reminder of why forceful and timely action is appropriate," Rosengren said.
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