DC stalemate could hurt economy, Boston Fed president says

The budget standoffs in Washington have the potential to derail the nation’s economic growth, the president of the Federal Reserve Bank of Boston said Wednesday,

Eric S. Rosengren, speaking in Vermont as the federal government shutdown entered its second day, said that combination of a tepid economic recovery and prospects of damaging stalemates in Washington contributed to his decision to vote in favor of continuing the Fed’s stimulus efforts at central bank’s policy meeting last money.

Specifically, Rosengren cited disagreements that have kept Congress from passing legislation, called a continuing resolution, to keep funding the government and the looming debt ceiling, which will require Congress to lift the government’s borrowing limit in about two weeks to avoid a technical default.

Advertisement - Continue Reading Below

“Unfortunately, this remains an area of significant uncertainty, given the debates in Congress on continuing resolutions and potentially allowing the country to default on its debt,” Rosengren told the Lake Champlain Regional Chamber of Commerce in Vermont. “The uncertainties, not to mention the outcomes themselves, threaten to have a collateral impact on the rest of the economy.”

In addition to holding its benchmark-short-term interest rate near zero, the Fed has been purchasing $85 billion a month in Treasury and mortgage-backed securities a month to lower long-term rates, such as for mortgage loans. The program has helped spur home and auto sales, he said.

But the job market remains weak, Rosengren said, which also led him to support the Fed’s move to continue pumping stimulus into the economy. He said he is particularly concerned about the decline in the labor force participation rate, or the percent of the population 16 years of age and over that is either working or actively looking for work..

He said normal retirement of boomers does not alone account for the size of the decline, a sign that the economy is not creating enough jobs. As a result, some workers are dropping out of the labor force because they have become discouraged by the shortage of job offers, he said, “a shortage that has been persisting over an extended period of time,”

“A significant concern is the longer we have such an elevated unemployment rate,” he said, “the more likely it is that some of those who have left the labor force due to the lack of jobs will simply never return.”

The main drag on the economy, he said, has come from cuts in government spending at the state and federal level, including automatic federal spending cuts known as “sequestration” that took effect earlier this year.

“Historically speaking, significant fiscal austerity such as we have recently seen is quite unusual at a time when the economy is trying to recovery from a severe recession,” he said.

Rosengren also echoed Federal Reserve chairman Ben Bernanke’s remarks after the September meeting, saying the Fed’s actions are not determined by “Wall Street’s expectations of what we might or should do.”

“Rather our policies need to be consistent with achieving key goals like supporting Main Street’s more rapid return to full employment,” he said.