Boston Fed president thinks it’s nearly time to taper the central bank’s stimulus
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The Federal Reserve’s bond-buying stimulus program had a specific goal in mind: purchase Treasury and mortgage-backed securities to enable banks to lend more and ultimately keep interest rates low while the economy suffered from COVID-related lockdowns.
Although the surge of the delta coronavirus variant threatens the prospects for a quicker economic recovery, central bank officials hinted this month that they were thinking of scaling back their bond purchases as labor conditions improve and temporary inflationary pressures put the squeeze on consumers.
What’s unclear is when such a tapering would happen, but Boston Federal Reserve Bank President Eric Rosengren believes it should begin as early as this fall.
“While I think that asset purchases can have a very positive impact on the economy in normal times, this is not really a normal time,” Rosengren told “Marketplace Morning Report” host David Brancaccio in an interview.
Rosengren believes the combination of rising prices for supplies and the relatively muted labor turnout in interest-rate-sensitive sectors like housing and automobiles should spur Fed policymakers to consider tapering these bond purchases sooner rather than later.
Below is an edited transcript of their interview focusing on the state of the economy, conflicting economic indicators and labor shortages in the New England region.
David Brancaccio: I keep reading, I keep saying on the radio, all these headlines about the delta variant of COVID and the possibility it slows down recovery. But you’re still worried about things boiling over. Share with us some of your thoughts about how you balance these conflicting directions and conflicting signs that we may be seeing.
Eric Rosengren: Well, as your question highlights, the delta variant certainly increases the uncertainty around anybody’s forecast. And it’s very important for the economy to get the personal and public health satisfied by getting as many people vaccinated as possible because we’re not going to have a full recovery until we no longer have the same concerns about the delta variant or any successor variants. That being said, the economy over the course of the summer has done quite well. So we just had an employment report and for the month of July, we created 943,000 jobs. We had something quite close to that in June. So having two months in a row of almost a million jobs each month indicates that we are opening up the economy despite the challenges of the virus right now.
Brancaccio: We are opening up, but are you still worried about bubbly behavior as much as you were maybe a month ago?
Rosengren: Yeah. I would highlight that the inflation readings that have been high recently, I’m not particularly troubled by. I do think that they will prove to be transitory and many of those price increases will moderate as we get into next year. But the one area that I’d say [I’m] paying very close attention to is housing prices. So with very low interest rates, it’s not surprising that asset valuations have gone up, including for housing prices. And if you look at housing prices across the country, you see that they’re all going up quite rapidly. So it’s not just happening in some areas that are not affected by the delta virus. It’s not happening just in cities, and it’s not just happening in the North or the South. It really is distributed across the United States. And that’s consistent with very low interest rates starting to have an impact on very high prices. And I’m sure you’ve heard many stories about how difficult it is, particularly for first-time homebuyers right now, to buy a house.
Brancaccio: It’s extraordinarily difficult in some parts of the country, maybe a lot of parts of the country. What are you seeing in the Boston area, where you have your focus?
Rosengren: So we’re certainly seeing it in the suburban areas. And if you go to the more rural areas of New England, including Vermont, New Hampshire, and Maine — areas that normally don’t see rapid appreciation in housing prices — you are seeing those markets being affected by people buying second homes and the fact that interest rates are quite low. So it’s, as I mentioned, not just a city phenomena, it’s a suburban and rural phenomenon as well. Prices in downtown Boston have not risen quite as dramatically as they usually do when we see overall housing prices go up, and that’s partly because people are still avoiding some downtown locations because of public health concerns.
Brancaccio: Now, you know, you’re not going to tell me you want to raise interest rates anytime soon. That doesn’t seem to be in the cards, certainly, among your colleagues, but the central bank, our central bank, the Federal Reserve does have other ways of stimulating the economy. You’d like to maybe start a more bold conversation about maybe ramping back the Fed’s bond purchase program?
Rosengren: So as you point out, we have been purchasing both mortgage-backed securities and Treasury securities. And the purpose of that is to lower interest rates. And that’s particularly true for interest-sensitive sectors, like housing and autos. I think unfortunately, at this time, while I think that asset purchases can have a very positive impact on the economy in normal times, this is not really a normal time. So if you look at the housing sector, material prices have gone up quite substantially. And construction firms are telling me that it’s quite difficult to hire labor. In the auto sector, because the chips that are in cars are in short supply, we’ve seen car prices go up, we’ve seen used-car prices go up quite dramatically. But we haven’t seen a great deal of additional employment in those interest-sensitive sectors, which highlights that maybe the cost-benefit [equation] for these asset-purchase programs are not as positive as we would normally see. And so I think there’s broad discussion now about when it would be appropriate to what’s called “taper,” which is start purchasing fewer of these long-term securities than we have been doing.
Brancaccio: And certainly your colleagues at the Fed have been hinting about the process of tapering could come at some point. Do you think there’s a more urgent need than you did, say, midsummer to get to the tapering?
Rosengren: I do think that would be appropriate, given that the efficacy of the asset-purchase program is now a little more questionable. And the fact that we’re getting very strong employment reports and, clearly, the inflation numbers have come in higher than our 2% inflation target. The guidance that we gave to the markets and to the U.S. public is that we needed to make substantial further progress from where we were at the end of last year. I think on inflation, we definitely have done that. On employment, I think if we get another strong employment report, we will be at the point of saying that we really have had a lot of progress in labor markets. The unemployment rate fell to 5.4% in the last employment report. Forecasters are expecting it to fall below 5% by the end of the year. That’s consistent with my own forecast. And so I do expect that it will be appropriate this fall to start the tapering process.
Brancaccio: I have to ask you, how do you process what many are calling a labor shortage? I was just up through your New England region in recent weeks and talked to some business owners, and they were really suffering. They said they’re just unable to find the people they need. There was a long-standing restaurant in one of the seaside towns in Maine that closed its doors over the last two weeks. It said it couldn’t get enough people to keep the enterprise going. What do you see at work with this labor shortage?
Rosengren: The labor shortage we’re seeing certainly isn’t unique to the coast of Maine. We’re seeing it throughout New England, particularly in coastal areas where there’s a lot of tourism. I think one of the challenges is that many workers are not anxious to go back in a situation where they don’t know if their customers are vaccinated or not, and they don’t know if they’ll be wearing a mask or not. And in that environment, people are asking for relatively low wages. How much of my personal health do I want to put at risk? As a result, I think that many of these type of jobs, where there’s a lot of interpersonal interaction, are areas where in order to attract the workforce, restaurants, hotels, retailers are finding that they have to offer higher wages for their workers to be able to get enough workers to fill out their needs. So in some sense, that’s a positive story because one way to get at economic inequality is for lower-wage occupations to see higher wages, and we are actually seeing that. But in many rural areas, particularly in places like the coast of Maine, it’s been difficult to get visas for foreign workers where they have traditionally worked in Maine restaurants. And in addition, getting people willing to take the risk of being in a highly interpersonal occupation has meant that there’s much more reluctance than we would normally see at this point in the recovery.
Brancaccio: It’s harder to bring in foreign workers with borders closed because of COVID restrictions. That’s what you’re referring to?
Rosengren: It’s both COVID restrictions and it’s just been more difficult to get visas for foreign workers as well. So it’s a combination of travel restrictions and visa restrictions.
Brancaccio: And I heard a lot of complaining from business owners about the enhanced unemployment benefits that the administration has running into September. They think that’s a disincentive for people to accept job offers from them.
Rosengren: Yeah, that program is going away in September. We’ll see how many people come back into the workforce at that point. I do think a bigger threat than what was happening with unemployment benefits is really what happens with our schools. So if we find that the delta variant is highly infectious and is a problem for keeping schools open, frequently, individuals who have child care needs also are working in places like restaurants, working in hotels, working in retail. And so if people are concerned about the public health for their children and schools start shutting down again, that will make it even more difficult to attract people back into the workforce.
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