Fed's Rosengren Sees Premature Taper as Growth Unassured

Federal Reserve Bank of Boston President Eric Rosengren, the lone dissenter from the Fed's plan this week to taper its bond purchases, said he isn't convinced the economy will improve next year.

"Like the committee, my assessment has brightened in recent months," Rosengren said Friday in a statement posted on the Boston Fed's website. "But, by the same token, I do not yet have sufficient confidence in this outlook to risk the removal of any monetary accommodation at this time."

After buying $85 billion in bonds every month in 2013, the Fed announced Dec. 18 it will cut the purchases to $75 billion in January, with Chairman Ben S. Bernanke citing "cumulative progress and an improved outlook for the job market."

The unemployment rate was reported at 8.1 percent when the Fed began its third round of bond purchases in September of 2012. The rate fell to a five-year low of 7 percent in November as the economy added 203,000 jobs.

Rosengren said the risk of too-low inflation also compelled him to vote against reducing bond purchases. The Fed's preferred measure of inflation, the personal consumption expenditures index, showed prices rising 0.7 percent in the 12 months ended in October. It hasn't breached 2 percent since April 2012.

"Many have pointed to temporary factors" for low inflation, Rosengren said. "The fact that the inflation rate has also been falling in many other developed countries and that core inflation has remained so low throughout this recovery suggests the risk that inflation has been depressed for other reasons, which may be less transitory."

Rosengren cautioned that the economic outlook of policy makers, including himself, have proven to be too bright.

"Over the recovery period, my forecasts, as well as forecasts of many others, have proven to be more optimistic than the actual outcomes," Rosengren said. "Furthermore, we remain far from both parts of the Federal Reserve's 'dual mandate' on employment and inflation."

The U.S. economy expanded in the third quarter at the fastest rate in almost two years as Americans stepped up spending on services such as health care and companies invested more in software.

Gross domestic product climbed at a revised 4.1 percent annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6 percent, Commerce Department data showed today in Washington. The gain exceeded the most optimistic projection in a Bloomberg survey.

The Standard & Poor's 500 Index rose 0.7 percent to 1,822.42 at 12:41 p.m. in New York, while the yield on the 10- year Treasury note fell 0.04 percentage point to 2.89 percent.

Rosengren, 56, became president of the Boston Fed in July 2007 and has been among the most outspoken supporters of Fed stimulus. He has dissented only once, opposing a FOMC decision in December 2007 to cut the Fed's target interest rate to 4.25 percent from 4.5 percent. He argued that the Fed should cut rates more quickly as the economy was deteriorating.

"The possibility that the economy will soon be in a recession is too high, and our action should be significant enough to substantially reduce that risk," Rosengren said at the meeting in 2007, according to transcripts released earlier this year.

His objection proved prescient as December 2007 marked the beginning of the longest and deepest recession since the Great Depression. Unemployment soared to 10 percent in October 2009.

Rosengren has supported the Fed's most recent easing, arguing the policy has provided a powerful boost to autos and housing, two industries which respond to lower interest rates because of the use of loans to finance homes and cars.

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