Boston Fed research suggests each $500 billion in asset purchases has led to a quarter-point decline in the unemployment rate and the creation of about 400,000 jobs, Rosengren said.
Meanwhile, an index of inflation tied to spending patterns rose 1.2% in the year ended in January, which is “far below” the Fed’s target of 2%, he said.
Rosengren spent much of his speech addressing concerns, raised this year by Fed Governor Jeremy Stein and Kansas City Fed President Esther George, that low interest rates could lead to excessive risk-taking and therefore threaten financial stability.
“I see little evidence that our monetary policies are generating significant financial stability problems at this time,” he said.
While U.S. stock prices have risen, the gains have been largely in tandem with corporate earnings and the price-earnings ratio for the Standard & Poor’s 500 index remains below its 20- year average, Rosengren said. Home prices are below their peaks, and about in line with rental rates, he said.
High-yield bond rates have dropped, though most of the decline has been in line with U.S. Treasury yields, the Boston Fed chief said. The largest U.S. banks are much better positioned to withstand shocks because they have considerably more capital than in 2008, he said.
While farmland prices have surged, any threat is likely to be concentrated in small banks and should be dealt with by bank supervision rather than monetary policy, which would be “a very blunt tool,” Rosengren said.
“While the Federal Reserve’s accommodative monetary policy has been an important driver of the current economic recovery, and the financial stability costs appear relatively modest at this time, we cannot be Pollyannas,” he said.
The Fed should continue to closely monitor whether central bank stimulus is “having unintended consequences,” the Boston Fed leader said, and areas of focus may include quality of covenants on high-yield bonds. Covenants are legally binding agreements in which the borrower agrees to certain stipulations over the life of the loan.
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