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A recovery that doesn’t feel like one

Bank leader sees snail’s-pace growth

By Megan Woolhouse
Globe Staff / August 26, 2011

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The nation’s economy is unlikely to slide into another recession, but economic growth may be so slow it will feel like one for many Americans, according to a newly pessimistic assessment from Boston Federal Reserve Bank president Eric S. Rosengren.

“Most forecasters have been downgrading their forecasts and I’m downgrading mine as well,’’ Rosengren said in an interview this week, offering a preview of the bank’s official outlook for the rest of the year. “At the beginning of the year I was much more hopeful we would see a pickup as the year went on. Unfortunately that has not occurred.’’

The troubled US economy and what the Federal Reserve might do about it will take center stage today when Fed chairman Ben Bernanke speaks at symposium in Jackson Hole, Wyo.

Like Rosengren, the Fed recently downgraded its outlook for economic growth.

Rosengren said he expects growth to be so weak through the rest of the year that the unemployment rate, 9.1 percent in July, is likely to rise.

He had earlier forecast a national economic growth rate of 3.5 percent for the year; he now expects a rate of just 2 percent.

“We need to get faster growth than that if we want the unemployment rate to come down,’’ Rosengren said.

Rosengren discussed options for policy makers as analysts and financial markets focus on whether Bernanke and the Fed will launch a new round of purchases of government bonds to stimulate the economy.

Last year, Bernanke used his Jackson Hole speech to set the stage for the last round of $600 billion in bond purchases, which ended in June.

Such a move is aimed at lowering long-term interest rates to entice consumers and businesses to borrow and spend. But it is an unusual - and controversial - step for the central bank, which has traditionally confined its monetary policy to setting short-term interest rates.

Such efforts pump more money into the economy, but at the risk of higher inflation. Rosengren supported earlier rounds of Fed bond purchases.

Bernanke has come under fire from Republican presidential hopefuls, including Governor Rick Perry of Texas, who called any such stimulus effort “treasonous,’’ saying they could warrant “ugly’’ treatment should Bernanke ever pay a visit to Texas.

Others have criticized the bank as too closely linked to the Obama administration.

Rosengren, who participates in the central bank’s policy decisions, said he would not address such assertions and defended the Fed’s independence.

Inflation remains low, below 2 percent, which gives the central bank “a little more latitude to have a little more stimulus,’’ Rosengren said.

Rosengren, who is not attending the Wyoming symposium, said he would not presume what Bernanke might say. As for his views on additional bond purchases, he said, “It’s too soon to make that determination.’’

In general, he said, the Fed would prefer to refrain from such nontraditional policies because it does not have as much historical experience affecting long-term interest rates as short term rates.

“If we were to see a more substantial slowdown than I’m expecting, then that would be something we would have to revisit,’’ Rosengren said.

Rosengren said it’s still unclear what impact the wild swings in stock markets will have on the recovery. But, he said, he is concerned about the results of a University of Michigan survey that earlier this month showed consumer confidence falling below 2008 levels, when the nation plunged into deep recession.

Other data suggest that economic growth will slow. New reports indicate that housing will be “flat at best.’’ US exports have also been weaker than anticipated and are likely to weaken further because of Europe’s debt crisis, he said.

Rosengren, who became president of the Boston Fed in 2007 just as the financial crisis struck, noted that some conditions have improved since then. Consumers and businesses today have less debt.

US businesses also have a lot of cash on hand, although it remains to be seen whether that will lead to more hiring. Orders for motor vehicles, a bellwether of consumer spending, have surged recently, he said.

Burgeoning national debt in the United States and Europe remains a long-term threat to the global economy, Rosengren said.

He noted how difficult it has been for US political leaders to compromise on debt questions; the problem is compounded in the European Union, where multiple countries must reach an agreement.

Rosengren also questioned the judgment of Standard & Poor’s, which recently downgraded the nation’s AAA credit rating.

“I’m not sure I would have downgraded the US before I downgraded other [AAA] countries,’’ he said. He would not identify the other nations.

Rosengren, a career employee at the Fed who rose through the ranks, said the stock market swings and fierce sell-offs did not cause him to make an dramatic changes to his own investments. He said with two children in college, he keeps a good portion of his assets liquid.

Stock market gyrations, however, should not deter long-term investors, he said.

“I think it’s important to get a path forward,’’ he said. But “there’s nothing that’s changed about the long-term prospects of the US.’’

Megan Woolhouse can be reached at mwoolhouse@globe.com.