Until the economy improves as expected, the Fed should not reduce accommodation, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Wednesday.
Rosengren said he opposed tapering asset purchases at the last Federal Open Market Committee meeting because he believed "the incoming economic data did not show the progress I had hoped and expected at the time of the June FOMC meeting, when the committee discussed a possible reduction in the rate of asset purchases sometime in the fall," according to text of a speech he was to deliver before the Lake Champlain, Vt., Regional Chamber of Commerce.
"Several factors caused me to strongly and unequivocally support continuation of the Fed's asset purchase program at the last policy meeting," he said, including "disappointing incoming economic data," that led to lower gross domestic product forecasts for this year and next, possible "disruptions in the nation's fiscal policies," and "long-term market rates that had already risen more than I thought was consistent with interest-sensitive sectors providing needed support to the economy's continued recovery."
While policy decisions, including asset purchases, need to be dictated by data, Rosengren acknowledged, "Forecasts are of course imperfect — and have tended to be overly optimistic over the previous four years." So he wants "data that compellingly suggest that over the next three years we are indeed on a path to reach full employment and 2 percent inflation" before the Fed takes action.
Additionally, Rosengren said, since policy moves based on data, there can't always be "signals" before a move is made. Interpretation plays a role in how members evaluate data, with certain data not giving complete information and reliant on "other, related" numbers.
The declining unemployment rate may be skewed by the labor force participation rate, which has slid over the past five years, "which may mean the unemployment rate in the previous chart underestimates reality." Also, payroll employment growth has slowed, when moderate GDP growth is considered, "suggests the economy is in a 'holding pattern' — just treading water rather than gearing up to make significant improvement in the still very elevated unemployment rate," Rosengren said.
Although GDP interest-sensitive sectors have been strong as a result of the highly accommodative monetary policy, the overall economy remains below what would be expected in a recovery.
He pointed to slower government spending (state and federal) and decreased consumer spending as a result of tax hikes as fiscal headwinds, which private forecasters expect to ease in the second half of the year, yet Rosengren noted, year-to-date consumer spending has not met targeted growth.
"Unfortunately, this remains an area of significant uncertainty, given debates in Congress on continuing resolutions and potentially allowing the country to default on its debt," he said. "The uncertainties, not to mention the outcomes themselves, threaten to have a collateral impact on the rest of the economy."
Data tapering at the last meeting would have been "premature." Rosengren added, "In my view, the asset-purchase program should remain dependent on incoming economic data, and we should seek to get the economy on a path to achieve both elements of the Fed's dual mandate — employment and inflation — as soon as possible, hopefully by 2016."
If the economy recovers quicker, he said, accommodation could be removed at a swifter pace, and conversely, should the economy slow, "we can and should provide more accommodation than is currently anticipated. If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years — and that should only occur when the data ratify our forecast for an improvement in real GDP and employment."