Low Interest Rates Still Needed
May 10, 2010
Super-low interest rates are still needed to encourage economic recovery, a Federal Reserve official said last Wednesday.
"While the incoming economic data have certainly been more positive of late, we remain far from our stated destination," Federal Reserve Bank of Boston CEO Eric Rosengren said in a speech to the Money Marketeers of New York University.
Rosengren is a member of the Federal Open Market Committee, which sets the target for the federal funds rate--the short-term interest rate banks pay to borrow money overnight from other banks. As the Fed raises or lowers the federal funds rate, banks eventually follow the trend with interest rates they offer consumers on products like savings accounts, money market accounts, CDs, and mortgages.
Labor Market Recovery Is Years Away
Rosengren said that even with rapid growth in the economy, it will take years to achieve the long-term goals of roughly 5% unemployment and 2% inflation. In March, the unemployment rate was 9.7%, and inflation in the past year was 1.3%.
"While real GDP began to increase in the third quarter of last year, growth so far has been insufficient to improve conditions much in the labor markets," he said.
Job losses are particularly severe in male-dominated industries, such as a construction and manufacturing. In March, the unemployment rate for men between ages 20 and 24 was 18.4%, Rosengren noted--more than 5 percentage points higher than for women in the same age group.
Rosengren agrees with private forecasts that project growth in the next four quarters to improve the labor market but predict that challenges remain on the horizon, including real estate problems, bank closures, non-performing loans on the books, and financial problems abroad, which could slow US exports.
