Federal Reserve

Fed's Rosengren calls for more explicit rates guidance


The Federal Reserve should "explicitly" state that it will keep interest rates near zero until the U.S. economy is within one year of reaching the central bank's employment and inflation goals, a top Fed policymaker said on Tuesday.

Floating yet another suggestion in the U.S. central bank's sometimes confusing attempts to telegraph its policies, Boston Fed President Eric Rosengren said the verbal guidance should, as time passes, be linked to how quickly the economy reaches the dual goals on employment and inflation.

"Ideally, forward guidance should, for the time being, remain qualitative but increasingly be linked to progress in achieving our dual mandate based on incoming economic data," Rosengren said in remarks prepared for delivery at Husson University.

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In particular, he said, "Forward guidance should be consistent with keeping interest rates at their very low level until we are within one year of reaching full employment and our 2 percent inflation target -- and the guidance could explicitly state that intention."

U.S. unemployment was 6.7 percent last month, well above Rosengren's estimate of "full employment" around 5.25 percent. Fed policymakers do not always agree on what constitutes full employment, the level at which the maximum number of Americans are employed without wage inflation pressures.

Inflation firmed a bit last month but remains well below the Fed's 2 percent target.

Rosengren has long argued that the labor market may have been permanently scarred by the deep 2007-2009 recession, and that as a result the Fed should only cautiously remove accommodation and be patient in raising rates from near zero, where they have been since late 2008.

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Since then, the Fed has tried an array of strategies to telegraph just how long it will wait to tighten monetary policy, including tying the ultra-low rates to time periods, and later, to specific unemployment and inflation thresholds.

As the U.S. recovery sputtered, many investors grew confused and impatient with the Fed's varied communications efforts. Last year, for example, talk by Ben Bernanke, when he was the Fed chairman, of eventually trimming bond purchases led to a sharp rise in market-wide borrowing costs that alarmed policymakers.

Last month, Janet Yellen, who took over as Fed chairman at the start of February, rolled out the central bank's latest version of forward guidance, effectively promising not to raise rates for a "considerable time" after the Fed halts its bond-buying program; the Fed has begun to trim its bond purchases and they should end by December at the latest. But Yellen sowed more confusion when she then told a press conference that a "considerable time" means about "six months" or so.

Rosengren appeared to be calling for another change to the Fed's so-called forward guidance on policy.

"Forward guidance should be increasingly focused on how quickly we expect to make progress on inflation that is well below our target, and on the significant underutilization of labor resources that persists well after the official end of the recession," he said.

Policy should remain "highly accommodative" until the U.S. and global economies are on "more solid footing," he said, citing the possible threat from the crisis in Ukraine. And he repeated a prediction of 3 percent U.S. growth over the next two years, noting significant problems persist in the labor market.