The overall economy is at risk of “a more significant downturn” from “the continued decline in residential investment,” Federal Reserve Bank of Boston president Eric S. Rosengren said yesterday.

“Falling housing prices further weaken the incentives for residential investment, but are also likely to dampen consumer and business confidence and spending,” according to text of a speech he delivered to the Connecticut Business and Industry Association and released by the Fed. “Furthermore, falling house prices roil financial markets and financial institutions by exacerbating exposures to the housing market.”

He suggested the Fed “can minimize the severity and spillover of housing and associated weakness by implementing policies that foster a sound macroeconomic environment, low and stable inflation rates, and a well-functioning financial system. In that regard, the Fed has reduced its key policy rate by 100 basis points over the past five months.”

Rosengren also hailed the new Term Auction Facility, which “enables banks with illiquid collateral to borrow from the discount window at a price determined by an open auction,” he said. “This innovative tool has the potential to provide greater flexibility for the Federal Reserve to respond to the sort of liquidity problems that we have seen in recent months.”

. “This is an unusual economic situation and we cannot predict exactly what is going to happen,” Rosengren said. The current economic problems are somewhat “unique,” he said, because the “decline in residential investment has occurred in an economic environment of reasonably healthy job and income growth, and low rates of unemployment.”


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