Boston Fed president sees ‘robust recovery’ in second half of 2021

Eric Rosengren expects significant job gains, but urges policy makers to address income inequality

Eric Rosengren is president of the Federal Reserve Bank of Boston.Andrew Harrer/Bloomberg

After 10 months of pandemic-induced hardship for many, the start of COVID-19 vaccinations and a new round of government relief spending have set the stage for a strong rebound in economic growth and employment in the latter half of the year, according to Eric Rosengren, president of the Federal Reserve Bank of Boston.

The surge in coronavirus cases since Thanksgiving will hold back any improvement until a large swath of the country has been vaccinated, Rosengren said in a videoconference presentation Tuesday to the Greater Boston Chamber of Commerce. Until then, service businesses, such as hotels and restaurants, will struggle as people restrict their interactions with others, and state and local governments will continue cutting services and jobs to close budget gaps.

“Although it seems likely to me that the economy will, at best, continue to grow modestly until there is widespread vaccination, I believe a more robust economic recovery — supported by expansionary monetary and fiscal policy — is likely to follow,” Rosengren said in remarks prepared for the event.

Rosengren, whose outlook mirrors the consensus of Fed officials and private economists, highlighted several optimistic trends: Stock prices are at near-record levels as investors remain confident of a recovery; interest rates are low, which will help cash-strapped consumers make it through the pandemic; the housing market is healthy; consumer spending on goods has recovered; and many businesses are increasing their capital spending.

“As a result, despite the near-term challenges brought on by COVID-19, I am optimistic that we will see significant employment gains over the next two years,” he said.

Rosengren, who isn’t a voting member this year of the rate-setting Federal Open Market Committee, expects the central bank to keep short-term interest rates low as inflation remains mostly below its 2 percent annual target over the next two years. That means borrowing costs will be low, and debt-fueled investment and spending could give the economy a boost.

Such a “low for long” interest rate environment comes with its own risks, Rosengren warned. It could prompt consumers and business leaders to take on too much debt, leaving them vulnerable in a downturn. Other potential obstacles to recovery include a delay in vaccinations and increases in real estate loans going bad as forbearance measures expire.

Rosengren encouraged the new Biden administration to bolster the stability of the financial system, whose weaknesses were exposed at the start of the pandemic, when the bond market and money markets temporarily went haywire. And he said income inequality is a significant challenge to a strong economy.

“Policymakers must be mindful of the deep pain still occurring in many segments of the economy — particularly for personal-service-related businesses (restaurants, hotels, retail stores, and tourism — for example) which employ large numbers of workers, many of whom have little savings to cushion against a disruption in wages that lasts for many months,” he said. “Frequently, these workers are people of color, young, or individuals with less educational attainment. Not surprisingly, the unemployment rate has risen the most for these groups.”

The economy has been propped up by trillions of dollars in government rescue spending, from enhanced jobless benefits to forgivable loans to small businesses and nonprofits, and the Fed’s easy-money stance, Rosengren said. The Boston Fed ran the Main Street Lending Program, a first-of-its-kind loan effort by the Federal Reserve to assist midsize businesses that were too big to qualify for Paycheck Protection Program grants but couldn’t borrow in financial markets.

The program, which is now closed, suffered from weak loan demand and a lack of interest of among banks in participating. But Rosengren said it helped 1,800 companies that borrowed a total of $16.5 billion, and he was disappointed the program wasn’t continued by Congress.

However, he said some changes to Main Street Lending would have made it more effective, including making it less complicated and using fees to encourage banks to lend rather than requiring them to hold 5 percent of each loan they originated.

“The Main Street Lending Program showed the feasibility of marshalling lenders and the public sector to assist hard-to reach businesses — businesses that can survive with the support of a bridge to better times, post-downturn,” he said.