The U.S. economy needs a far better footing before the Federal Reserve reverses its current policy, and even more stimulus may be needed if the housing market hampers the rebound, a top Fed official said on Friday.
Boston Federal Reserve Bank President Eric Rosengren, in his first speech of the year, again endorsed the U.S. central bank's massive bond-buying program as a way to boost a recovery that until only recently looked anemic.
Though recent data has been consistent with a somewhat happier new year, Rosengren -- who is seen as well to the dovish end of the Fed's policy-makers' spectrum -- said the recovery in the world's biggest economy is still weak.
There will be a time when these aggressive actions need to be reversed, but first we need to get the economy on a much more solid footing, said Rosengren, who this year rotated out of a voting slot on the Fed's policy-setting panel.
Even with a relatively robust recovery, it will take several years before we attain full employment and an inflation rate close to a long-run expectation of 2 percent, he told the New England Mortgage Expo here.
Core inflation is now running at about 1 percent, down from 2.5 percent before the recession triggered by the financial crisis. Meanwhile, unemployment is at a still-high 9.4 percent.
The Fed embarked on the $600 billion round of Treasury securities purchases in November, a move that garnered much criticism from those worried it would eventually spark a sharp run-up in inflation.
Rosengren said the Fed had the tools and commitment needed to address any long-term inflationary pressures, adding he expects core inflation to remain below 2 percent over the next four years.
He also predicted GDP growth of 3.5 percent to 4.0 percent over 2011.
Rosengren said housing was a key in deciding when the Fed would begin to reverse its stimulus plan.
If housing-related growth is not going to boost the recovery this time around, we may need policy -- particularly monetary policy -- to continue playing a stimulative role, he said, adding housing was unlikely to provide as much support as in previous rebounds.
The housing sector is a clear pitfall for the U.S. economy, sowing caution in economists' recovery forecasts. Still, the sector's latest data show applications for U.S. home mortgages rose as lending rates eased from recent highs.
Rosengren pointed to current, cautious lending standards and high vacancy rates as among those factors putting pressure on home prices, and creating housing-related headwinds.
Fed officials have begun in recent days to detail their stance for the new year, with many rallying behind the quantitative easing program of bond-buying, known as QE2, before Fed Chairman Ben Bernanke convenes the first meeting this year on January 25-26.
The Fed has kept rates near zero for more than two years. The question of when to start removing stimulus could take center stage at the Fed this year.
The current level of accommodation from monetary and fiscal policy is appropriate, Rosengren said Friday. However, once the economy has significantly improved, both fiscal and monetary policy will need to be much less accommodative.
(Reporting by Jonathan Spicer, Editing by Chizu Nomiyama)