Rosengren: 'Premature' to Stop QE3 Now

While labor markets have improved, unemployment remains high, making it unwise to stop monetary policy accommodation now, and when it is time to make changes, a slowing rather than a complete stop would be the best procedure, Federal Reserve Bank of Boston President & Chief Executive Officer Eric S. Rosengren said Wednesday.

"Despite the slowly improving labor market outlook, the unemployment rate remains at levels close to the peaks of the past two recessions, indicating that the economy remains far from the full employment level," he told the Economic Club of Minnesota, according to prepared text of his remarks, released by the Fed. "In terms of monetary policy, it would in my view be premature to stop the Fed's large-scale asset purchase program at this time. I believe the Fed should continue the purchase program until we see more sustained improvement in labor markets and have greater confidence that the economic recovery is sufficiently self-sustaining to yield continued progress in reducing the still very high unemployment rate."

Unemployment should fall to 7.25% or lower by year-end, according to Rosengren, a figure he concedes is more optimistic than most projections.

Despite this, he said, "My personal view is that the benefits of this accommodative monetary policy program still significantly outweigh the costs. While some improvement in labor markets has been achieved, it does not yet constitute progress sufficient to merit halting the asset purchase program."

But, Rosengren added, stopping the purchases "abruptly" might be "undesirable … so it may make sense to consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy."

Slowing the purchases, since it's an open-ended program, would not necessarily result in a smaller central bank balance sheet. "That would depend on having a fixed point for cessation of purchases, combined with a lower flow of purchases," Rosengren said. "So, even if we were to adjust the rate of monthly purchases, the ultimate size of the Fed's balance sheet would depend on the point of cessation. If economic growth proves sufficient and the purchase program was not extended over a longer time period, the size of the balance sheet could be smaller than otherwise."

Inflation remains below target and the jobless rate belies full employment. "Potential unintended costs of the accommodative policy are not currently evident," he said. "Taken together, these facts provide the rationale for my own view that, while we have seen some improvement in labor market conditions, significant accommodation remains appropriate at this time."

Rosengren said labor market improvement despite the payroll tax increase and the federal budget sequester is "a quite positive sign of underlying economic strength."

But, "adjustments" to the asset-purchase program should be "based on economic outcomes," with gradual reductions in buys resulting from improvement in the economy and the outlook, "rather than suddenly stopped once we have achieved substantial improvement in labor markets."

Should incoming economic data not be "consistent with both elements of our dual
mandate, I believe the Fed should be willing to increase asset purchases."

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