Preaching patience, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Wednesday, the Federal Reserve needs to assess labor market slack before tightening monetary policy.
"As the unemployment rate falls and approaches the 6.5 percent threshold, the Federal Reserve needs to make an assessment of the degree of remaining labor market slack as it sets monetary policy," Rosengren told the Boston Economic Club, according to prepared text released by the Fed. "I believe the elevated number of workers who are part time for economic reasons, the still-high unemployment rate, and the very low inflation rate are all consistent with significant slack in labor markets. Such conditions call for a very patient approach to removing monetary policy accommodation, particularly given the softness in recent economic data. It is vitally important that labor markets continue to improve. Monetary policy should continue to be accommodative, supporting a return to full employment, given the very low inflation rates."
Recent employment reports, which failed to meet expectations, may be "anomalies" due to the cold and snow in parts of the country, or may "reflect a slowing trend in the economy - a pattern that we have certainly seen repeatedly since the onset of this recovery," Rosengren noted. "In my view, this uncertainty provides an additional strong rationale for taking a patient approach to removing the monetary policy accommodation that the Federal Reserve has been deploying."
Also, the Fed's 6.5% threshold "is well above" Rosengren's estimate of 5.25% unemployment as "full employment." He suggested the 6.5% rate "was set conservatively, to essentially serve as a point where the Fed's monetary policy committee would begin to focus on a much broader set of economic variables in order to consider whether it was appropriate to begin raising short-term interest rates."
By his estimates, full employment will be reached in mid-2016.
