Without faster economic growth, it could take until 2017 or 2018 to reach full employment, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Monday.
With the economic recovery "tepid" to date, reaching full employment, which he defined as a 5.25% unemployment rate, would take until the end of 2016, but that would be with GDP of 3.3%, when the Fed expects GDP growth of just 3%. Should GDP be 2.8%, he estimated reaching full employment at the end of 2018.
Using the expected 3% GDP growth figure, and assuming the economy follows the predicted path full employment won't occur until 2017.
"Certainly there are a number of important assumptions made in doing this analysis, but it illustrates that unless the economy grows much faster than the 2.2%, we have experienced to date during the recovery, it will take quite some time to reach full employment — and exact a heavy human toll, Rosengren told a gathering at the University of Massachusetts, according to prepared text released by the Fed.
"Monetary policy has been highly accommodative in order to mitigate the restraining effects emanating from the financial crisis, fiscal restraint, and slow growth of trading partners," he said. Policy partly offset the headwinds, but resulted in only a tepid recovery.
And while growth is seen advancing, Rosengren suggested the 3% growth assumes "significant continued stimulus from monetary policy" and still falls short of what is needed.
Gains, including better balance sheets for business and individuals, higher stock and home prices that allow additional spending, "derive from the help that stimulative monetary policy has provided," he said. "As a consequence, monetary policy is likely to need to remain accommodative for some time so that we can achieve full employment within a reasonable forecast horizon."
"Even when the Fed eventually removes some of its accommodation, such as large-scale asset purchases, we will in my view need to leave short-term interest rates at their very low levels until there is much more progress reaching full employment and the 2 percent inflation target," Rosengren said. "Furthermore, the pace at which the Fed raises rates, when that becomes appropriate, should be, in my view, quite gradual, unless the economy picks up much faster than is currently expected. Overall, monetary policy needs to continue to be data driven and, of course, to be focused on meeting the Fed's dual mandate — within an appropriate time frame."
While policy needs to respond to the state of the economy and be data-dependent, Rosengren said it also needs to "be forward-looking, taking into consideration how long it is expected to take to return to full employment within a context of price stability."
He added that even when the large-scale asset purchase program ends "we will not be restraining the economy — in fact, we will still be adding stimulus to the economy but in smaller increments than before."
The timing of the first taper doesn't matter, he said, with "start dates differing by a quarter or two would generate only relatively small changes in the overall size of the Fed's balance sheet. That is certainly one reason for being patient — waiting until evidence of a more sustainable recovery is more clear-cut — before beginning any reduction in the size of the purchase program."
Comparing this recovery to three earlier recoveries, Rosengren said, "The severity of the employment loss, and the significant headwinds facing the economy after the severe financial crisis, are both important reasons why monetary policy has needed to remain quite accommodative."
After the earlier recessions employment recovered in two years. The difference he said is that government has cut back on spending in this recession, while adding employees in earlier ones. "The CBO estimates that fiscal austerity measures have reduced 2013 GDP growth by 1.5 percentage points — a very significant headwind. Had the economy grown by 3.5 percent rather than 2 percent over the past year, job growth would almost surely have been stronger, unemployment lower, and inflation closer to the two percent goal."