Published January 15, 2013
PROVIDENCE, Rhode Island (Reuters) - Aggressive policy easing will remain necessary for the simple reason that levels of both U.S. unemployment and inflation are not where the Federal Reserve wants them to be, a top U.S. central bank official said on Tuesday.
In a textbook argument that appeared to push back at some of his more hawkish peers, Boston Fed President Eric Rosengren brushed aside concerns over inflation and made it clear that he will support the central bank's efforts to relieve U.S. joblessness, which was 7.8 percent last month.
Rosengren, a voting member of the Fed's monetary policy panel this year, said the easing efforts have already encouraged Americans to buy homes and cars and other goods that help spur economic growth, for which he predicted an acceleration.
"Continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed's dual mandate, inflation and employment," he said in prepared remarks to the Greater Providence Chamber of Commerce.
"Currently, inflation is somewhat below our 2-percent target, and unemployment is well above a longer-run sustainable rate," he added.
Last month, the U.S. central bank dug deeper into its toolbox to announce it would keep its key interest rate near zero until the unemployment rate dropped to 6.5 percent, as long as inflation expectations remained below 2.5 percent.
The federal funds rate has been near zero since late 2008, in the depths of the U.S. financial crisis that stunned the U.S. economy and sparked a deep global recession.
Last month's interest-rate pledge comes even as the Fed buys $85 billion in longer-term assets per month - effectively a two-front effort by the central bank to spur investment and growth three-and-a-half years after the end of the Great Recession.
Rosengren, a dovish policymaker, is for now aligned with the majority of top Fed officials including Chairman Ben Bernanke, who point out that easy monetary policies should raise inflation and lower unemployment toward their stated goals.
But more hawkish officials argue that year after year of low rates and the use of unconventional - and untested - policies such as the asset buys set the stage for a run-up in inflation.
Kansas City Fed President Esther George and James Bullard, of St. Louis - both of whom have a vote on policy this year - expressed such reservations in speeches last week.
But Rosengren, who was among the first to call for the latest round of quantitative easing (QE3) to avoid stagnation in the labor market, charged on Tuesday "there has been no upward trend in inflation."
The policymaker noted that Rhode Island, where he gave the speech, in November still suffered an unemployment rate above 10 percent. The national jobless rate, meanwhile, has gradually fallen to 7.8 percent from a crisis-era peak of 10 percent in 2009.
The "societal costs to elevated unemployment rates that are falling only slowly show why accommodative monetary policy is both appropriate and needed," Rosengren said, adding that a stronger rebound in construction and manufacturing, for example, would help get those with less education back to work.
U.S. GDP grew at a decent 3.1 percent in the third quarter, the fastest pace since late 2011, though it is expected to have slowed sharply in the last three months of the year.
Rosengren predicted economic growth would again pick up in the first half of this year, and rise to closer to 3 percent in the second half - assuming U.S. lawmakers do not disrupt the economy as they decide on tax and spending policies, he said.
Turning to the ongoing fiscal debate in Washington, Rosengren said the deliberations have already curbed business investment. He added that government spending would be a "major uncertainty" this year.
"While the need for long-run sustainable fiscal policy is both clear and uncontroversial," he said, "I believe it is important to achieve sustainability in a way that does not risk the tentative economic improvements we have experienced to date."
(Reporting by Svea Herbst-Bayliss; Writing by Jonathan Spicer)