On a day where the government released more bad news on hiring, a Federal Reserve official said Friday that unemployment will take a long time to come down, which means the central bank will keep its stimulative policy stance for some time.
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| Rosengren |
While employment has “improved” relative to the past, “it appears that this recovery will likely experience only a slow improvement in the employment picture, and that the unemployment rate will remain quite elevated during the early phases of the recovery,” Federal Reserve Bank of Boston President Eric Rosengren said.
He said he believes economic output gains will be “strong enough to produce some employment growth, but that rate of employment expansion will not likely be rapid enough to put a large dent in the unemployment rate.”
That comes with serious implications for what the Fed does with interest rates and its other programs of support.
“With significant capacity in labor markets, wages and salaries and the ability of businesses to increase prices are all likely to be restrained, resulting in little immediate inflationary pressures,” Rosengren said in the prepared text of his remarks. “This should allow for accommodative monetary policy to continue to support the economy until the underlying demand of consumers and businesses becomes self-sustaining,” he said.
Rosengren, who was addressing the Connecticut Business and Industry Association, in Hartford, Conn., will hold a voting slot at this year’s Federal Open Market Committee meetings.
His speech, which was prepared in advance of the December jobs data’s release, was given after the report was made public. The jobs report was a bit of a setback for the economy, with the pace of job losses speeding up and falling by 85,000 in the final month of the year, after a revised 4,000 gain the month before. The unemployment rate held steady at a high 10%.
The report reaffirmed that even as the economy is recovering, it will be a long slow process to undue all the economic damage wrought by the financial crisis. As long as hiring remains moribund, most believe the Fed will face little pressure to tighten monetary policy, be it by lifting interest rates or via other avenues.
Rosengren’s worries about hiring extended to his economic outlook as well, with the official saying “I expect a rather slow recovery in output.” He noted that he expects fourth quarter 2009 growth to be “stronger” than what was seen in the third quarter, although recent gains are largely tied to benefits from businesses cutting inventories.
The central banker counted financial markets, consumer caution and slow job growth as the three primary headwinds the economy faces on its path to recovery.
“Financial markets are in a much better state than they were a year ago” although “while the banking crisis has passed, banking problems remain,” Rosengren said. Meanwhile, “consumers and businesses will likely remain cautious,” and a reluctance to hire will mean a “slow recovery” in employment.