Sanity from the Boston Fed

Eric Rosengren, president of the Boston Fed, interviewed by Jeremy Hobson on Marketplace.  Here are some excerpts.

Whether the Fed should continue waiting and seeing:

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.

Should policy actually be tied to results?

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.

"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?"

 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.

What about inflation? (Probably a response to Dallas Fed president Fisher.)

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. ... 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.

If you intervene now, won't you be accused of politics?

An independent Federal Reserve should be focused on the business cycle, not the political cycle, and that's what I'm focused on.

Go listen to the entire interview.  Hopefully, now that the July jobs report is in, the doves will push their case harder at the next meeting.