Rosengren called for the Federal Reserve Bank to stimulate “a more rapid recovery” by taking additional steps to cut long-term interest rates, such as purchasing mortgage-backed securities to push to historically low mortgage rates lower. That could help boost home sales and values, aiding states such as California, Nevada and Florida, which have had both dramatic declines in real estate and significant job losses.
“My sense is that in areas where high levels of unemployment might otherwise lead individuals to use home-equity financing or credit cards to start a business, today many find access to such forms of credit impeded by impaired credit scores and the disappearance of home equity given depressed home values,” Rosengren said. “It unfortunate but not surprising that the ‘birth rate’ of new establishments declined sharply and remains below historical levels.”
Rosengren has been a consistent supporter and leading voice for additional stimulus to accelerate what has been an extremely slow recovery. He has repeatedly urged the Fed and the federal government to take steps to boost growth and lower the unemployment rate.
Because of the recovery’s anemic pace and a weak labor market that has kept costs from rising much, Rosengren said he expects inflation to remain below 2 percent over the next several years. “Labor demand simply remains too weak,” he said.
Rosengren, however, warned that trying to solve the current economic problems by severely cutting government budgets would be a mistake, and could do more harm than good. “Excessive fiscal austerity here or abroad has the potential for near term downside risk,” he said.
Like other forecasters, Rosengren said he believes economic growth this year will be modest -- 2-to-3 percent -- but could improve in later months. The problem, he said, is that the financial crisis took a major toll on households and firms. And as credit remains hard to obtain, many are struggling to fix their finances amid high levels of foreclosures and falling housing prices in some areas.
While small companies -- which account for more than 50 percent of all private sector employment -- have helped lead the economy out of recession in the past, the lack of financing now available to such firms is hindering job growth.
“Loan originations to small businesses have been quite weak,” Rosengren said. “Smaller firms have not pushed the improvement in employment that we saw in the last recession.”
