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The Fed has kept rates near zero since December
2008, and though most Fed officials now believe raising
borrowing costs sometime this year will be appropriate, they
also have said they will be "patient" in beginning to tighten
monetary policy. While unemployment has dropped to 5.6 percent
from its recession-era peak of 10 percent, inflation is running
at around 1.3 percent, well below the Fed's 2-percent goal.
Central bankers worry about persistently low inflation not only
because it can be a sign of slack in the labor market, but also
because it can undercut inflation expectations, acting as a
further drag on growth.
"Given how low total and core inflation have fallen in most
developed countries, a policy of patience in the United States
continues to be appropriate," Boston Fed President Eric
Rosengren said in remarks prepared for delivery in Frankfurt,
Germany. "This is particularly true given the inherent asymmetry
that we face at the zero lower bound – meaning, while we have
all kinds of room to respond to an unexpectedly favorable shock,
we remain quite limited in our ability to respond to negative
shocks."
Rosengren was speaking at a conference sponsored by The Peterson
Institute for International Economics and Moody’s Investors
Service's 8th Joint Event on Sovereign Risk and Macroeconomics.
Rosengren, who does not vote on Fed policy this year, did not
address his preferred timing for raising U.S. interest rates in
his prepared remarks, which were largely focused on making the
case that the Fed's three rounds of quantitative easing
effectively helped boost the U.S. economy.
The European Central Bank recently said it would launch its own
bond-buying program to combat low inflation and sluggish
economic growth, a move which Rosengren implicitly applauded.
"A significant undershooting of the inflation target should be
treated with the same policy urgency as a significant
overshooting of the inflation target," Rosengren said. The
current drop in oil prices "has served to accentuate a potential
monetary policy pitfall, in this case, the failure to quickly
and vigorously address a significant undershooting of inflation
targets, potentially leaving economies stagnant at the zero
lower bound," he added.
In the U.S., he said, there is "insufficient evidence" that
inflation is rising back to the 2-percent goal, and little
evidence that wage growth is returning to pre-crisis levels.
(Reporting by Ann Saphir; Editing by Diane Craft)
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