Rosengren outlines exit options from ‘essential' unconventional monetary policy

The Federal Reserve's "new" monetary policy tools, including forward guidance and large-scale asset purchases, were "essential" in ensuring the economic recovery in the United States, Federal Reserve Bank of Boston President Eric Rosengren said in a speech at the Central Bank of Guatemala yesterday.

Turning to how long those measures should stay in place, Rosengren said he does "not expect that it will be appropriate to raise short-term rates until the US economy is within one year of both achieving full employment and returning to within a narrow band around 2% inflation".

When the time comes to raise interest rates, Rosengren suggested one way of doing so would be to raise the rate of interest the Fed pays on excess reserves – or to engage in overnight reverse repurchase agreements, which are, in effect, collateralised loans to the Fed that would provide a risk-free rate of return to investors. The Fed "could in effect place a floor on how low short-term rates would fall in the marketplace" since investors would be unwilling to accept lower rates of return, he said.