(Reuters) - Slow growth and a weak jobs market mean the U.S. economy will continue to need support from accommodative monetary policy for years to come, a top U.S. central banker said on Wednesday.
Boston Federal Reserve Bank President Eric Rosengren said he “strongly and unequivocally” supported the Federal Reserve’s unexpected decision last month to keep up its $85-billion-a-month bond-buying stimulus, adding that reducing the program “would have been premature.”
The current shutdown of the U.S. government, caused by a budget standoff between congressional Republicans and the White House, could further delay cuts to the program because the government is no longer producing official data on the economy, he said.
“It would make me less willing to remove accommodation until we had good data,” Rosengren told the Lake Champlain Regional Chamber in South Burlington, Vermont. He added that at the time of the September decision he had expected lawmakers to avert a shutdown.
The Fed may even need to wait until after it gets data on October to assess any collateral damage from the shutdown and the coming fight over raising the U.S. government’s debt limit, Rosengren said.
“It does put out further into the future the time when we can get a real assessment of where the economy is,” he said.
The Fed, which has kept short-term rates near zero since December 2008, has been buying Treasuries and mortgage-backed securities to push down long-term borrowing costs and encourage investment and hiring.
“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 told 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 Fed’s 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 the Fed’s decision last month marked a sharp contrast with several other Fed officials who, in the two weeks since the meeting, characterized the September decision as a close call.
To Rosengren, a voting member this year on the Fed’s policy-setting committee, it simply wasn‘t.
Data on jobs had fallen short of what he had expected in June, he said, when Bernanke said that a reduction in the bond-buying program would likely come later this year.
Uncertainty over fiscal policy and slow GDP growth also were cause 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, he said, job growth has been so tepid, and inflation has been 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 Fed’s 2-percent target.
“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.
Rosengren’s remarks underscored his place 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.
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 anticipate.”
Bottom line, he said, “if the economy is not improving as expected, we should not reduce the monetary policy accommodation.”
Reporting by Ann Saphir; Editing by Chizu Nomiyama