NEW YORK - Federal Reserve Bank of Boston President and Chief Executive Officer Eric S. Rosengren aimed to discredit four misconceptions about the Fed – that it is not audited or supervised, not transparent, has caused inflation by printing money, and that further monetary policy actions will not help the economy - in a speech to the Boston Economic Club.
“Central banking and monetary policy are not easy to explain, but the Fed could have done a better job of it,” he said, according to prepared text released by the Fed.
Addressing the first misconception, Rosengren said each Federal Reserve bank has professional internal auditors, an outside accounting firm audits all financial statements, “the Federal Reserve’s Inspector General, created by Congress, audits our activities; the U.S. Government Accountability Office audits our actions, and Congress, which created the Federal Reserve System, provides significant oversight regarding Fed actions,” with reports to Congress and legislation that has changed the Fed’s role.
“I suspect that some who argue for more audits of the Federal Reserve may actually be advocating for the politicization of monetary policy,” Rosengren suggested. The Fed was designed to be non-partisan and conduct “monetary policy in the public interest free of political influence. Good monetary policy in the public’s long-run interest can involve unpopular decisions in the short run.”
The second misconception was true 25 years ago, he said, but the Fed has moved to become more transparent “particularly in recent years,” he said. “Let me admit that in the midst of the financial crisis in the fall of 2008 one could fairly say that we did not spend sufficient time explaining to the public the unique and extraordinary actions being taken. All I can say is that in the midst of the crisis there was a focus on solutions, and given the severity of the situation, this resulted in our spending less time communicating well about what we were doing and why.”
While stating that focusing on the crisis instead of communicating is “no excuse,” Rosengren noted that when the Fed “tried since to explain precisely what we did and why, but we are still some distance from being understood, or fully trusted for that matter.”
He said the Fed “learned from this. I would argue that at this point our organization has shifted a great deal compared to two years ago, and at this point we are quite transparent and getting better at it in time.” He pointed to the detailed minutes and the information they now contain, the chairman’s press conference as examples of progress.
The Fed’s balance sheet expansion, referred to by some as “printing money” has not resulted in significant inflation, he said. However, since banks are not lending money readily, the balance sheet isn’t inflationary. Also, little upward pressure exists on wages, also holding back inflation.
“Make no mistake, the Federal Reserve will need to remove its current policy accommodation as the economy improves,” he said. “The current level of bank reserves would not be appropriate if we were at full employment – such accommodation would indeed be inflationary in that situation. However, that is not the situation the country is in now, and I fully expect we will remove accommodation appropriately as the economy improves.”
So, “inflation has remained extremely restrained during this period of accommodative monetary policy necessitated by economic conditions.”
As for the final misconception, Rosengren said, “It is unlikely that lower rates would have no impact on the economy.”
“The empirical evidence shows that Fed purchases of Treasury and MBS securities did cause market interest rates to fall,” he said. Boston Fed research suggests “a sustained decline in the 10-year Treasury rate of 100 basis points would lead to a cumulative increase in real GDP over two years of approximately 2.5 percent. With the reduction in interest sensitivity in housing more recently, the model would imply that a sustained decline in the 10-year Treasury rate of 100 basis points would now lead to a cumulative increase in real GDP over two years of approximately 2 percent.”
Events, including the situation in Europe, make “forecasting the future path of the economy quite challenging – and should instill humility about predicting the future, or how future shocks could impact the domestic or world economy,” he said.
Fiscal policymakers need to address the economic woes. “Central banks cannot address these economic problems on their own. They can mitigate some of the problems by reducing the cost of credit to individuals and businesses. And make no mistake, while the scale of the problem is great, that should not dissuade us from actions that make even just ‘a dent.’ For instance, an action that reduces the unemployment rate by half a percent does not bring us close to full employment, and does not solve the country’s problems, but nonetheless would perhaps create roughly 750,000 jobs that may not have been created in the absence of the action.”
