Slow growth and a weak jobs market suggest the U.S. economy will continue to need support from accommodative monetary policy for years to come, making reductions in stimulus inappropriate at this point, a top U.S. central banker said Wednesday.
Boston Federal Reserve Bank President Eric Rosengren said he "strongly and unequivocally" supported the Fed's unexpected decision last month to maintain its $85-billion-a-month bond-buying stimulus, adding that reducing the program "would have been premature."
The Fed, which has kept short-term rates near zero since December 2008, has been buying Treasurys and mortgage-backed securities to push down long-term borrowing costs and encourage investment and hiring.
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"If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years—and that should only occur when the data ratify our forecast for an improvement in real GDP and employment," Rosengren said in remarks to the Lake Champlain Regional Chamber in South Burlington, Vt.
Economists and market investors had thought Fed Chairman Ben Bernanke would use the September meeting to begin the process of phasing out the asset buying that has swollen the central bank's balance sheet to $3.6 trillion over nearly five years.
Rosengren's full-throated defense of last month's decision was a sharp contrast with several other Fed officials who have characterized the move as a close call. To him, a voting member this year on the Fed's policy-setting committee, it simply wasn't.
Data on jobs had fallen short of what Rosengren had expected in June, when Bernanke said that a reduction in bond-buying likely would come later this year.
Uncertainty about fiscal policy and slow growth were also causes for concern, Rosengren said, as were long-term market rates that had risen so high they threatened to slow the economy.
"Had U.S. fiscal matters not been so problematic, and incoming data on real GDP and employment stronger, it may well have been appropriate to take some action in September," he said. "A policy that is data-dependent cannot always be 'signaled' clearly in advance."
In fact, Rosengren said, job growth has been so tepid and inflation so low that the Fed may well miss its targets on both key aspects of the economy through 2016.
Unemployment stood at 7.3 percent in August, the most recent reading, and inflation has been running well below the 2 percent target.
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"In my view, the asset-purchase program should remain dependent on incoming economic data, and we should seek to get the economy on a path to achieve both elements of the Fed's dual mandate—employment and inflation—as soon as possible, hopefully by 2016," he said.
If growth does exceed expectations, the Fed can remove accommodation more quickly, and if it slows unexpectedly, "we can and should provide more accommodation than is currently anticipated," Rosengren added.
Bottom line, he said, "if the economy is not improving as expected, we should not reduce the monetary policy accommodation."
His comments underscored his place as among the most dovish of the Fed's policymakers. Like fellow dove Minneapolis Fed President Narayana Kocherlakota, who last week called on the Fed to do "whatever it takes" to boost jobs, Rosengren has been a stalwart supporter of keeping up stimulus to boost the recovery.