The economy could see a significant rebound this year thanks to accommodative monetary and fiscal policies, but the labor market still has much room for improvement, said Eric Rosengren on Monday in the Boston Federal Reserve Bank.
With labor market slack still significant, and inflation still under the target of 2 percent by the Federal Reserve, my perspective is that the current highly virtual policy of monetary policy is appropriate, Rosengren said in remarks prepared for a meaningful conversation with business leaders.
It will also be important for new vaccines to prevent the spread of coronavirus variants of the virus, he said. Assuming that virus variants do not become particularly problematic, we will see an unusually strong post-recession recovery, he said.
Under a new framework adopted last year, Fed officials will be patient and leave rates near zero until inflation materializes- no longer raising rates in anticipation of higher inflation when the unemployment rate is low, Rosengren said.
While policymakers should also be vigilant about the risks lurking in the financial markets, Rosengren said. For example, some money market funds faced liquidity problems last year after some investors pulled their money quickly, he said.
Solutions could include requiring some funds to invest in government-backed debt more. It could also help to develop a system for buying and selling Treasury securities that is not as dependent on broker dealers, which can face strain when large volumes of Treasury securities are sold.
During the economic recovery, policymakers should be vigilant in removing these risks to financial stability, he said.