Rosengren: Shutdown Could Delay QE Taper

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Published October 03, 2013

| FOXBusiness

A top Federal Reserve official suggested Wednesday the government shutdown could move the Fed to delay any pullback in its economic stimulus programs.

"It would be nice if the economy were able to quickly snap back from what's currently occurring down in Washington -- it's unclear at this point," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview with FOX Business. "But unless we do get stronger data than what we are likely to see, I would not expect that we would be removing the (monetary policy) accommodations."

Earlier this year, with economic growth and job creation improving, the Fed signaled that it could begin dialing back its most recent stimulus program, its "quantitative easing" bond buying, later this year as long as growth continued to improve. It has been purchasing $85 billion a month in bonds to help keep down interest rates on mortgages and other loans.

But its projections for steady, sustained growth and better job creation had begun to look optimistic by the Fed's last policy meeting, in September. Unveiling a new, weaker forecast for the economy, the Fed announced it would not begin to taper its bond buying. That surprised financial markets, which had been expecting a reduction in purchases by a modest $10 billion to $20 billion a month despite some recent softer economic data.

Because of the weakening indicators, continued low inflation and a backup in longer-term interest rates as taper talk grew louder, the decision to reject tapering "was not as close a call for me as it was for some of my peers," Rosengren said.

"If you look at the components of GDP that have been improving, they have been the interest-sensitive sectors," added Rosengren, who voted along with most Fed officials for this policy stance. "Residential investment over the last four quarters has grown around 15%. Auto sales have been growing quite strongly. That's partly a function of the fact that interest rates have been quite low. So, it is important that interest rates stay low enough that those interest-sensitive sectors continue to provide some improvement in the economy over time."

But two reasons Fed Chairman Ben Bernanke gave for the Fed's September policy stance after the meeting: prospects for a government shutdown and the pending battle between House Republicans and the Obama Administration over again raising the ceiling on the national debt.

"At the September meeting, we were concerned that there was a risk that we might have a fiscal shutdown and possible problems with the debt ceiling," Rosengren said after a speech in Vermont.  "Now we actually have had the shutdown. It remains to be seen how the discussion is with the debt ceiling."

"But that does mean that we may have a weaker second half of the year than we were forecasting even at the September meeting," he said. "It's not just what's happening with the government spending, it's what happens with businesses and households as they see what's happening in Washington, and to the extent that we want to get a stronger economy, we should (not) be removing accommodation until we actually see that in the data."

Rosengren, who was visiting Vermont for a policy speech, would not speculate on the potential impact on the economy of the government shutdown or a failure to raise the debt ceiling. But the last shutdown, for 20 days in 1995-96, lowered GDP by 0.25%, according to one study, and the budget and debt ceiling battle in 2011 cut economic growth as well.

"Fiscal disruptions have the potential to slow down the economy in an undesirable way," Rosengren said. "We were expecting that we would actually see a pick-up (in growth) in the second half of the year. That was partly driven by the hope that consumption would improve. We've had up until now an improving stock market, housing prices that have been going up, and some increases in payroll employment growth. All those factors would say that normally you would expect consumption to be improving, and we were expecting the fiscal headwinds to actually abate, that fiscal policy would stop being a headwind. That doesn't look like it's going to be true, and actually fiscal policy right now is being more disruptive than we would have anticipated."

Rosengren said he hoped Washington politicians would settle their differences soon to limit any economic damage. But if they don't and the economy suffers, he said the Fed could consider helping it by increasing its bond purchases and by communicating to consumers and investors that it would keep short-term interest rates lower for even longer, with "easy money" policies continuing into 2016 if necessary.

"I think we should keep all options on the table until we see what actually happens and how the data comes in," Rosengren said. "But I think the chairman (Ben Bernanke) is exactly right that if the economy takes a big hit from what's happening with fiscal policy or some other shock that we're not anticipating right now, that monetary policy should remain accommodative, and we should use whatever tools that we have at our disposal to make sure that the interest-sensitive sectors, at least, continue to grow appropriately....We can influence the interest-sensitive sectors, and those are all growing in part because of our actions."

"It's not that we want to have this degree of accommodation," Rosengren added. "It's that the economy needs it, given the way the data's been coming in."

The shutdown could complicate policy making for the Fed -- it is ending most government data collection and reporting for key economic indicators; the Labor Department may not release the critical month jobs report for September scheduled for release on Friday.

"For a data-driven policy, you do need data," Rosengren said. "Now the government is not the only source of data that we get...But it does hurt our ability to determine how the economy is growing without having things like GDP, unemployment, payroll employment numbers available. So, I don't think we're flying blind, but we're a little bit impeded if we don't have all the kinds of data that the government's normally producing...More than likely, I think we would err on the side of waiting (to change policy) until we had good data to be sure that we're really seeing a pick-up."

Rosengren said that for him, "an environment where we were getting 200,000 jobs" -- it is coming in closer to 150,000 a month now -- "where we were getting much stronger GDP growth, would be an environment where we should be removing accommodation."

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