(Updates with comments on interest rates starting in 12th paragraph.)
Nov. 16 (Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said the central bank still has power to boost the economy through lower interest rates.
“The common misconception is that rates are already low so further monetary policy actions will have no impact on the economy,” Rosengren said in the text of a speech in Boston today. “In fact, statistical analysis suggests the opposite.”
Fed presidents this week differed over whether their outlook for the economy requires additional monetary easing. More action “may be needed” to reduce “persistently high unemployment,” San Francisco’s John Williams said yesterday in Scottsdale, Arizona. James Bullard of St. Louis said the central bank’s policy is “appropriately calibrated” and should only be loosened if the economy deteriorates.
Measures to add stimulus to the economy drew dissent from Philadelphia’s Charles Plosser, Narayana Kocherlakota of Minneapolis and Richard Fisher of Dallas at the Fed’s August and September meetings. A November decision to refrain from a third consecutive move drew dissent from Chicago’s Charles Evans.
Even small easing steps can be worthwhile when the economy is so badly damaged, Rosengren said today.
“While the scale of the problem is great, that should not dissuade us from actions that make even just ‘a dent,’” he said. “For instance, an action that reduces the unemployment rate by half a percent does not bring us close to full employment, and does not solve the country’s problems, but nonetheless would perhaps create roughly 750,000 jobs that may not have been created in the absence of the action.”
‘Far Too High’
Fed Chairman Ben S. Bernanke on Nov. 2 said unemployment is still “far too high” and the Fed may take further steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public.
Additional stimulus “remains on the table,” Bernanke said at a press conference in Washington, declining to specify conditions that would prompt a move. “While we still expect that economic activity and labor market conditions will improve gradually over time, the pace of progress is likely to be frustratingly slow.”
Economic indicators since then indicate that the economy is weathering disruptions in financial markets caused by the crisis in Europe. Industrial production climbed 0.7 percent in October, more than forecast by economists, figures from the Federal Reserve showed today. Other reports showed the cost of living unexpectedly fell and builder sentiment improved.
U.S. stocks fell as the Bank of England said failure to resolve Europe’s debt crisis may hurt the global economy. The Standard & Poor’s 500 Index sank 0.4 percent to 1,253.07 at 12:46 p.m. in New York.
Rosengren, who said in a Nov. 7 speech that the Fed should continue to act, defended the ability of the central bank’s policies to improve the economy.
“It is unlikely that lower rates would have no impact on the economy,” Rosengren said in his speech today to the Boston Economic Club. Lower rates would still affect big purchases typically made with loans, such as homes and automobiles, he said. They would also “improve the potential benefit” of investment projects and “impact exchange rates and foreign trade,” Rosengren said.
Rosengren cited research from the Boston Fed showing that prior to the financial crisis of 2008, a one percentage-point reduction in the 10-year Treasury yield would lead to a cumulative increase in inflation-adjusted gross domestic product of about 2.5 percent over two years.
After the crisis, a similar drop in yields should lead to a 2 percent increase in growth, according to Rosengren, who said “concerns with falling prices, high unemployment, and limited access to credit have likely all contributed to this lower --but clearly non-zero -- response to lower rates in housing markets.”
The yield on the 10-year Treasury note fell 3 basis points to 2.01 percent at 12:05 p.m. today. A basis point is 0.01 percentage point. The yield fell to a record close of 1.72 percent on Sept. 22.
Rosengren, 54, became president of the Boston Fed in July 2007. He joined as an economist in 1985 and earned his doctorate from the University of Wisconsin, Madison in 1986.
He used his speech to address four “common misconceptions” about the Fed, which he identified as the beliefs that lower rates would be ineffective, that the Fed is not audited, that it’s not transparent, and that the expansion of its balance sheet has caused inflation.
Rosengren mentioned financial audits, Government Accountability Office audits, and the ability of Congress to change the legislation governing the Fed.
“Some who argue for more audits of the Federal Reserve may actually be advocating for the politicization of monetary policy,” Rosengren said. “Monetary policy has been shown to result in better economic outcomes” for growth and price stability “when it is not influenced by partisan politics.”
--Editors: Chris Wellisz, Carlos Torres
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