The Fed and the pandemic economy
Eric Rosengren, president of the Federal Reserve Bank of Boston since 2007, is a member of the Fed’s interest rate-setting committee. Last year, he also oversaw the Fed’s Main Street lending program, which provided loans to mid-sized companies as part of the central bank’s response to the viral pandemic. Rosengren favored continuing the program, but it was shut down by the Treasury Department on January 8. He also felt that the program’s lending terms were too restrictive. The Associated Press spoke on January 13 with Rosengren about these and other topics.
You’ve said that you are optimistic about the economy later this year. Can you tell us a little more about why you feel that way?
In the near term, I’m pessimistic because we’re not doing a very good job of controlling the virus, and the vaccination rate is still quite low relative to the need. But once people have been vaccinated, I would expect a pretty strong economy starting around the second half of the year. The stock market’s quite high, and real estate prices have gone up. Second, many people have been saving a lot more money. I would expect that there will be a lot of pent-up demand for some of those consumer services that we’ve been deprived of as a result of the pandemic. There are a lot of tailwinds ... as we get into the second half of the year.
Some investors are worried that inflation could jump later this year when all that spending kicks in. Could that force the Fed to raise interest rates more quickly than expected?
Inflation’s not just a price change but persistent price changes over time. What we’re looking for is a sustained change in the inflation rate, ideally at our 2% target. I don’t expect we will get there, certainly over the next year. In the near term, the focus needs to be on getting back to full employment, getting inflation closer to our 2% inflation target. [The most recent year-over-year measure of consumer inflation is 1.4%].
The Fed is pegging its short-term interest rate at nearly zero while purchasing $120 billion in bonds each month to keep longer-term rates low. Meanwhile, the stock market has reached new highs. Are you concerned about a bubble?
The time I worry about financial stability concerns is not when inflation’s low and the unemployment rate is high. It’s perfectly appropriate to have highly accommodative monetary policy until we get back to full employment. I do worry about financial stability. A “low for long” policy does have the risk that it encourages both firms and individuals to take on more risk. Now at this stage, we want people to take on more risk. We want people to be more willing to take on debt to buy a car or a house. That’s exactly how monetary policy works. What we need to do is be careful, though, that as the economy fully recovers, that we don’t continue to have conditions that are no longer appropriate.