Fed’s Rosengren says QE3 will avert labor-market ‘scarring’

Federal Reserve Building Federal Reserve Building

Federal Reserve Bank of Boston President Eric Rosengren said the central bank’s third round of quantitative easing will bolster the housing market and economy while helping to prevent lasting damage to the labor market.

“It is important to generate faster growth to avoid what some call labor market ‘scarring’ -- where long-duration unemployment becomes ingrained into our labor market,” Rosengren said today, according to the text of a speech to be delivered in Quincy, Massachusetts.

Rosengren’s comments contrast with those of Federal Reserve Bank of Dallas President Richard Fisher, who said yesterday that the bond purchases will probably fail to create jobs while risking higher inflation. Neither is a voting member this year of the Federal Open Market Committee, which last week voted 11-1 to buy $40 billion a month of mortgage-backed securities.

Policy makers led by Chairman Ben S. Bernanke are seeking to boost growth and lower a jobless rate stuck above 8 percent since February 2009. The FOMC said in its Sept. 13 statement that economic conditions would likely warrant holding the Fed’s target interest rates near zero through at least mid-2015 and that monetary stimulus will remain appropriate for a “considerable time” after growth strengthens.

Stocks fell today after a report showing that more Americans than forecast filed claims for unemployment benefits added to concerns that the global economy is cooling. The Standard & Poor’s 500 Index declined 0.6 percent to 1,452.66 at 10:06 a.m. in New York.

Outdated Skills

“Long periods of unemployment frequently deplete the savings of the unemployed, make re-employment harder” Rosengren said, and “may lead to skills becoming less than current.”

Rosengren said that a “very challenging economic climate confronts us all” and that monetary policy is not “a panacea.” He added that appropriate fiscal policies in the U.S. and a pickup in global growth could “both provide significant positive effects, and shorten the time needed for unconventional monetary-policy actions like those we have announced.”

The decision to purchase mortgage bonds will place downward pressure on rates for home loans and help improve property sales and prices, Rosengren said.

The housing market has already been improving, a trend confirmed by reports yesterday showing that sales of previously owned homes and work on single-family projects climbed in August to the highest levels in two years.

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