Jeremy Hobson: When we talk about the Fed, there are really two camps of people at the Federal Reserve. There are those who think we should be doing a lot more stimulus monetarily, and getting the economy going again and focused on that employment mandate that the Fed has. And then there are those who are worried more about inflation, and don't want the Fed to be expanding its balance sheet.
Well one person who thinks there should be more stimulus is a guy named Eric Rosengren, and he happens to be the president of the Federal Reserve Bank of Boston. And he joins us now, good morning.
Eric Rosengren: Good morning, nice to be with you, Jeremy.
Hobson: Great to have you. Let's start with the economy: How would you describe our economy right now, how it's doing?
Rosengren: I would describe our economy as treading water. At the beginning of the year, we started with 8.3 percent unemployment, and the July employment report, which came out last week, also had 8.3 percent unemployment. So there's really been no improvement in labor markets over the last seven months. In addition, the percent of the population that's employed and the labor force participation rate has been roughly the same as it was in the beginning of the year. So that's kind of treading water.
If I look at GDP, which are the goods and services produced in the economy, the first quarter was only 2 percent growth, the second quarter was 1.5 percent growth. So the economy slowed down. Much of that is because the global economy has slowed down, and because there are significant concerns about fiscal austerity both here and abroad, and what's happening in Europe. Those concerns have caused both households and businesses to cut back on spending that they might otherwise be making. And as a result, if you look at the GDP report, I'd make the analogy that we're treading water but taking a few gulps in the lake. That it's really time to get more growth, to get more improvement in the labor market, in effect to swim to shore.
Hobson: So why didn't the Fed step in at its most recent meeting with more monetary stimulus?
Rosengren: It made sense to wait until we got this employment report to confirm that we were doing no better than treading water, and it makes sense to get a sense of what's happening in the global economy as well. But my own view is at this point, we have information that has confirmed that it doesn't look like we're going to pick up in the second half of the year. My own expectation is that the second half of the year won't be much better than the first half, because the drivers of fiscal austerity and European problems aren't likely to be resolved in the next two quarters, and that monetary policy shouldn't wait any further before reacting to the global slowdown that we've been encountering.
Hobson: But can monetary policy step in and fill the void where fiscal austerity is taking place? I mean, is it just you take away one and you can put in the other.
Rosengren: So it's not filling in the void, but it's help mitigating some of the factors that are buffeting the economy right now. So there are a number of ways that monetary policy works, but it can affect both the housing sector, consumption and business-fixed investment, and all those can be an important driver to making sure that rather than having an economy that's growing no better than 1.5 to 2 percent, we get a better outcome than that.
Hobson: Now you want the Fed to sort of change the way that it does these big bond purchases that it calls quantitative easing, and instead of sort of setting the limits upfront on how many bonds it's going to buy, you want your colleagues at the Fed to just keep buying until they see results in the labor market?
Rosengren: So the focus not only for quantitative easing but also on any kind of forward guidance for how long interest rates stay low should be focused on the economic outcomes that we want. So we should be focused on getting growth and income that is satisfactory, and that results in a labor market that is improving. So I would have any of our programs, whether it's forward guidance or whether it's quantitative easing, tied to getting the right kind of economic outcomes before we stopped. So I would want a substantial program if we did quantitative easing, and I would tie it to getting the kind of income growth that we want, or tie to getting clear improvements in the labor market.
Hobson: You think that you can see a direct connection at some point between the Fed pumping money into the economy essentially, and somebody getting a job somewhere?
Rosengren: I do. Any of our models would indicate that some of the programs that we've already done have provided some stimulus to the economy. It's probably not the growth that we wanted, and unfortunately, the economy's been buffeted by factors that we couldn't completely offset, such as what's been going on in Europe. In fact, in the absence of some of the European problems, I think we would have more of a sense self-sustaining recovery right now. I certainly think that additional monetary policy accommodation can make a difference, can make sure that the economy grows faster than it would in the absence of the policy, and that we get a better outcome for labor markets.
Hobson: What about the idea that these jobs that are created just from that kind of thing may not be the jobs that we need in the future, that this is not going to retrain somebody into a new business that's going to be a real part of our economic future?
Rosengren: So this isn't the only policy we should be looking at to improving the labor markets, but it's the Federal Reserve can do. So areas I agree are important are thinking about retraining the labor force and making sure that people can get the kind of jobs that provide a sustainable lifestyle. But a lot of those programs are in the realm of fiscal policy, which the monetary authority has no control over.
Hobson: Do you think that Congress has dropped the ball in terms of fiscal policy for the last couple of years?
Rosengren: I think it would be very useful to have more clarity on what the potential spending cuts and what the potential tax increases will be. So the uncertainty about what the rules of the game are going to be next year I think are causing some households and businesses to defer decisions, and when households and businesses defer decisions, that shows up in slower economic growth.
Hobson: What about the risks that your counterparts on the other side of the ideological spectrum would bring up, which is that we may at some point have a big inflation problem, and it could come quickly and without warning, if you keep putting more stimulus into the economy.
Rosengren: One of the concerns surrounding the Federal Reserve expanding its balance sheet has been that we would induce inflation. We first expanded our balance sheet in the fall of 2008, and then with our two quantitative easing programs. Despite the fact that we've expanded our balance sheet quite substantially, and we've had more than four years since we started those programs, we're still seeing an inflation rate below our 2 percent target. So for our total PCE inflation, which is the inflation target that the Federal Reserve is tied to, it's only been growing at 1.5 percent over the last year. And if you look at that same measure, taking out food and energy, it's 1.8 percent. That just highlights that despite the fact that we have taken expansionary policy over the last several years, we've yet to see the inflation that some are concerned about.
Hobson: What about the idea that it could change quickly?
Rosengren: We've been waiting for four years. In order for it to change quickly, you'd have to see a very rapid expansion in lending. You'd start seeing evidence in banking markets; we're just not seeing that evidence.
Hobson: When you go to work every day, do you feel like you're in unchartered territory, or do you look at this economic situation that we're in and say, 'We've been here before, I can look back to this point in time and say this is what will happen if we do this?'
Rosengren: We're certainly in unchartered water. We're doing unconventional policy for a reason, that we've kind of exhausted the conventional policies that we normally would do. So normally the Federal Reserve focuses on the federal funds rate, a short-term interest rate that we can move up or down depending on that's happening in the economy. Those rates are now bound by zero, so we have to be doing other types of monetary policy. Some of them have been tried in other countries or in different circumstances. But the effects of these types of policies are more uncertain than our more traditional tools. So there is a reason for some caution, and not a rush to make changes using unconventional policy. But I think the length of time that we've been stagnant in the economy calls for us to once again try to use some of those unconventional tools.
Hobson: Do you think that politics are at play right now? Is the Fed scared to act because it thinks its actions will be seen as political?
Rosengren: An independent Federal Reserve should be focused on the business cycle, not the political cycle, and that's what I'm focused on.
Hobson: Do you think your colleagues feel the same way?
Rosengren: Can't speak for anybody but myself.
Hobson: How long do you think it's going to take until we are out of this economic slump that we've been in for the last several years? When will we be able to look forward and say, 'You know what? The U.S. economy's doing great, and we are back on top again'?
Rosengren: It's going to be a number of years before we're back to full employment. I think the appropriate monetary and fiscal policies can make a big difference on how quickly we get to that point. But there's certainly things that we can't control. What happens in China and whether China's slowing, and what kind of policies they do, we have no control over. What's happening in Europe and the very serious problems that they're to address, we have no control over. So part of these, they're factors that are outside of our control, but in the absence of some of these other issues, I think taking the right policies, we will get much stronger growth than we would in the absence of those policies.
Hobson: Eric Rosengren is president of the Federal Reserve Bank of Boston. Thank you so much for talking with us.
Rosengren: Thank you, I enjoyed the interview.