NEW YORK - Boston Federal Reserve Bank President Eric Rosengren said Wednesday that U.S. monetary policy "needs to be more stimulative" than it is now and that "more aggressive" easing actions will be necessary if a European shock or some other downside side risk materializes.
Rosengren, who will return to the voting ranks of the Fed's policymaking Federal Open Market Committee next year, made clear he is not satisfied with the degree of stimulus being provided by the FOMC's current policy stance, even though that body has called it "highly accommodative."
He argued that the economy is growing too slowly and is likely to continue growing too slowly to reduce unemployment significantly and that joblessness is primarily "cyclical" -- due to insufficient demand -- not "structural" in nature.
Rosengren seemed to be suggesting that the FOMC should take further easing steps at its June 19-20 meeting and that it should be prepared to do even more if the European debt crisis, the U.S. "fiscal cliff" or some other shock worsens an already unsatisfactory outlook.
Even assuming that Europe and the United States "muddle through" their fiscal problems, he forecast growth of just 2.3% this year, with unemployment staying at 8.1% and inflation running below the Fed's 2% target.
"Given the poor current conditions and my forecast for continued weakness -- and the evidence that suggests the problem is one of aggregate demand rather than structural unemployment -- I believe monetary policy needs to be more stimulative if we hope to meet both elements of the dual mandate in a reasonable time frame," he said.
"And should some of the downside risks that I have emphasized materialize, such as a significant disruption from abroad, more aggressive actions would certainly be warranted," he added in remarks prepared for delivery to the Worcester, Massachusetts Regional Research Bureau.
Earlier, Rosengren had highlighted the risk that "European problems could become a much greater restraint on growth this year." He also mentioned potential downside risks from the Middle East and from the U.S., if automatic tax hikes and spending cuts are not averted at the end of the year.
But the FOMC should not wait for those risks to become real before acting to spur faster growth, in Rosengren's view.
"Given my expectations of only modest growth, no improvement in the unemployment rate, an inflation forecast below 2%, and significant downside risks to the forecast, I believe monetary policy should remain accommodative at this time and indeed that we should be looking for ways that monetary policy can foster more rapid growth, to bring down the unemployment rate more quickly," he said.
"I believe further monetary policy accommodation is both appropriate and necessary," he continued. "The U.S., like many other countries, needs to facilitate a more rapid recovery, and monetary policy is one important tool with the potential still for encouraging faster growth."
Noting that employment is "nowhere its previous peak," even allowing for unusually weak construction and government labor conditions, Rosengren said he is "especially concerned about the ongoing weakness there."
Some Fed officials contend that much of the high unemployment is structural in nature -- a result of such things as "mismatches" between business needs and the skills of available workers. But Rosengren, siding with Fed Chairman Ben Bernanke and other top policymakers, contended that "most of the problem is in a lack of aggregate demand." He said, "it is cyclical more than structural."
Rosengren acknowledged there are "some structural components of the current high unemployment rate," but argued "the bulk of the problem is cyclical."
He said his "desire to stimulate more growth now is partly to prevent the structural problem from becoming more severe because the economy did not re-employ workers more quickly."
To reduce cyclical unemployment, the Fed needs to stimulate more demand, i.e. more spending, according to Rosengren.
"Growth has been only modest nationally, and I believe we need substantially more growth if we want to achieve full employment within a reasonable period of time," he said.
As things now stand, though, Rosengren said he sees growth "right around its 'potential' rate of between two and two-and-a-half percent -- which implies no significant improvement in labor markets over the course of this year."
"And even this modest pace of growth is contingent on some fairly significant assumptions -- that Europe will be able to muddle through its current problems, and that in the United States the government will be able to reach agreements to avoid a so-called 'fiscal cliff' looming at the end of this year," he added.
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