BANGOR — Federal Reserve Bank of Boston President Eric Rosengren said Tuesday the central bank should link interest-rate guidance to the economy’s progress toward both sides of its mandate for full employment and stable prices.
The Fed “could promise to keep short-term interest rates at very low levels until the economy is within one year of reaching full employment and 2 percent inflation,” Rosengren said in remarks prepared for a speech in Bangor. He said a jobless rate of 5.25 percent represents full employment.
“While the economy has gradually improved, 6.7 percent unemployment and inflation around 1 percent remain far from normal economic conditions,” said Rosengren, who doesn’t vote on the policy-setting Federal Open Market Committee this year. The United States “still requires an unusually accommodative stance of monetary policy.”
Fed officials are grappling with how to offer guidance on the likely future path of interest rates after they dropped a promise to keep rates low as long as unemployment remains above 6.5 percent. Instead, the Fed will consult a “wide range” of indicators when considering the first rate increase since 2006.
At its meeting last month, the FOMC said rates would remain low for a “considerable time” after it ends its bond-buying program. It also reduced the monthly pace of purchases by $10 billion, to $55 billion.
The last meeting on March 18-19 was accompanied by the quarterly release of policy makers’ projections for employment, growth, inflation and the benchmark interest rate, followed by a press conference by Chair Janet Yellen.
The rate forecasts showed more officials predicting the main rate, which has been kept close to zero for five years, would rise at least to 1 percent at the end of 2015 and 2.25 percent by the end of the following year, higher than previously forecast. Yellen downplayed the importance of the projections, telling reporters they’re less important than the FOMC policy statement.
“One purpose of forward guidance is to restrain longer- term market interest rates to support the struggling economy by promising to keep the short-term interest rates the Fed can control at very low levels,” Rosengren said. “There was not much to be gained by maintaining our threshold language.”
The main unemployment rate “understates the severity of the problem,” Rosengren said, noting that “significant problems in labor markets persist even at this stage of the recovery.” He cited elevated levels in broader labor-market indicators such as people working part time for economic reasons as well as “marginally attached” workers.
Payrolls, excluding those at government agencies, rose by 192,000 workers in March after a 188,000 gain the previous month that was larger than first estimated, the Labor Department said earlier this month. Private employment exceeded the pre- recession peak for the first time.
Still, inflation as measured by the Fed’s preferred personal consumption expenditures price index has remained below its 2 percent goal for almost two years. The gauge dropped to a 0.9 percent year-over-year pace in February, down from 1.2 percent the prior month and less than half the Fed’s objective.
Rosengren, a consistent supporter of the Fed’s stimulus, initially opposed the central bank’s December decision to begin slowing the pace of bond-buying. Since then, he has said that while he would have preferred to delay tapering, he supports the strategy of trimming purchases in $10 billion increments at each FOMC meeting.
Rosengren, 56, said in February the Fed may halt its reductions in bond-buying if the economy showed weakness beyond unusually harsh weather at the start of the year.
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