Boston Fed Chief: Risks Shadowing Economy’s Rise

01.06.2012
Economy

The U.S. economy is slowly improving—but risks of economic shock are also rising says Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston.
Speaking at the CBIA/MetroHartford Alliance Economic Summit and Outlook today in Hartford, Rosengren said labor market conditions are still “quite weak” but “much better than we’ve been seeing.”
The nation’s GDP also is improving, and inflation should stay low. Lurking as a major downside risk, however, is the escalating tension with Iran and how that might impact oil markets.
Other concerns are the financial health of the European Community and what he called the possibility of “excessive fiscal austerity here and abroad.”
[VIDEO: Watch Eric Rosengren’s address at the 2012 Economic Summit & Outlook] Labor market
Rosengren spoke on the day the nation’s unemployment rate dropped to 8.5%, the lowest rate in nearly three years. That’s good, he said, but still much higher than the pre-recession level between five and six percent.
Many people are working part-time jobs, said Rosengren, which indicates that the marketplace demand is still less than desirable. “These people have the right talent, they’re just not working full time.”
Home prices have declined as the unemployment rate has risen, although the Northeast is better off than states such as California, Nevada and Florida.
What’s more, small businesses are not hiring, having had to cut back much more than in other recessions. Small business starts have been “severely hampered by the decline in house values and the tightening of credit standards,” said Rosengren.
“We’re just not seeing the creation of new businesses.” Instead, employment and business growth has been mainly in midsize and larger companies, where credit conditions have been more favorable.
Overall, the jobs rebound of this Great Recession has been very slow, with the U.S. still “far away” from its previous peak employment. Other recessions have seen a quicker rebound, especially in small businesses.
Downside risks
It’s hard to ignore the world’s economic challenges, said Rosengren, such as Europe’s monetary crisis and the instability in the Middle East.
Somewhat tongue-in-cheek, he said “our economy would be better off if everybody stopped watching the news for a year.”
Monetary policy can’t impact challenges like the Iranian threat, said Rosengren, but it can promote economic and employment growth.
He said he expects the Federal Reserve to continue to promote growth and encourage employment, looking for ways to target improvements especially in housing and small businesses.
While he wouldn’t comment on any specific candidate, Rosengren said that “the major objective of any presidential candidate should be on getting the unemployment rate down.”
The longer our unemployment rate stays high, the harder it will be to get back to the pre-recession level of around a 5-6% unemployment rate.

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