NEW YORK – The recovery remains slow, in part, as a result of the poor condition of household finances, which has stagnated new business formation, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Friday, and he suggested the Fed could promote better recovery through stronger growth.
“Given the low inflation rate and weak labor markets that are both likely to persist this year, I believe the Federal Reserve should continue to explore ways to promote more rapid recovery through stronger growth,” Rosengren told the Connecticut Business & Industry Association, according to prepared text of his remarks, released by the Fed.
Among the Federal Reserve’s tools, Rosengren mentioned to communicating “the likely future path of the economy and the implications for interest-rate policy … and considering additional large-scale asset purchases.”
“In addition, I believe that policymakers can and should continue to look at ways to better target fiscal and monetary policy to address the housing and small business financing problems we are seeing in this recovery,” he said. “I believe that the continuing difficulties compel us to think creatively and proactively about ways to return the economy to full employment.”
Economic data have shown improvement since summer, and price spikes, especially in food and energy, and supply shortages have eased. Rosengren predicted inflation will remain under 2% for “the next several years.”
Weak job growth and labor demand remain problems.
“The monetary policy actions already taken by the Federal Reserve are allowing firms and households to speed up the adjustment process, and as such are laying the foundation for a stronger economy,” he said.
“One of the distinctive features of this recession has been the substantial decline in household net worth, particularly resulting from the decline in real estate values,” Rosengren added. “During recessions that include sizable job losses, some people use difficult labor markets as their impetus to start a small business. Such efforts have often been financed through home equity loans, which tend to be the lowest-cost type of financing available, especially compared to the much more expensive use of credit cards.
“However, the ability to start a small business in this way has been severely hampered by the decline in house values and the tightening of credit standards. These factors have made the traditional sources of entrepreneurial financing much less readily available,” he said.
Rosengren suggested the Fed buy more mortgage-backed securities to spur a more rapid recovery in housing. “Of course, these Fed actions would be even more effective if accompanied by fiscal policies designed to speed the recovery in housing,” he said.
Given that the problems that led to the recession are not easily resolved, “only underlines the need to look for creative policy solutions targeted to both housing and small business.”
Further, downside risks remain from Europe’s woes, as well as the possibility of “excessive fiscal austerity here or abroad,” and the ever-present uncertainty in the Middle East.
