The Fed should keep making asset purchases, its third round of quantitative easing, until the jobless rate falls to 7.25%, if market conditions signal "substantial improvement," Federal Reserve Bank of Boston President Eric Rosengren said Thursday.
The 7.25% rate should be "a threshold, not a trigger, Rosengren told a group at Babson College, according to prepared text of his remarks, released by the Fed.
"The distinction is important," he said, defining a trigger as a set of conditions that necessarily imply a change in policy. A threshold, unlike a trigger, does not necessarily precipitate a change in policy."
Under Rosengren's beliefs when the jobless rate hit 7.25%, "we would undertake a full assessment of labor market conditions and inflationary pressures to determine whether further asset purchases are consistent with the desired trajectory for reaching our inflation and unemployment mandates in the medium term."
He estimated GDP would have to grow at a 3% rate for a year, "making this a challenge to achieve."
Consumer spending patterns indicate economic improvement "and appear to be responding (as desired) to monetary policy accommodation," he said. "The initial response in financial markets was larger than many expected."
And, he noted, "increased quantity of bank reserves that resulted from these unconventional monetary policy actions" have not pushed inflation over 2%.
But these advances are still vulnerable to "abrupt fiscal austerity or adverse shocks from abroad." Additionally, Rosengren voiced concern about Hurricane Sandy's effects on fourth-quarter economic performance. "In general, potential downside risks make an open-ended monetary policy particularly attractive, because policy can recalibrate in response to such shocks without starting up new programs."
Rosengren also noted the lack of experience with a bloated balance sheet could result in "unintended consequences," which "should not be dismissed." He added, "We are very attuned to these concerns and are working to address them."