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Rosengren Says Low Inflation Risks Echoing Japan’s Malaise

May 16, 2013

(Updates with additional comments starting in fourth paragraph, Plosser in 13th.)

May 16 (Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth.

“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren said in the text of prepared remarks delivered in Milan today. Low inflation and high unemployment “could lead one to argue that policy has not been sufficiently accommodative.”

The Federal Open Market Committee said May 1 that it will increase or decrease the pace of its monthly bond-buying in response to changes in inflation and the labor market. Several officials in recent weeks have signaled concern about slowing inflation, which was at 1 percent in March as measured by the personal consumption expenditures index.

“My own assessment is there’s still a fair amount of capacity that we need to make up for, which is one reason I think it makes sense to have an accommodative policy to make sure we get the labor market to rebuild more quickly than it would,” Rosengren said in response to audience questions at the event.

Inflation Outlook

In his speech, he said the level “to which the inflation rate has fallen would actually be of some concern in the event that the economy was hit by a negative shock.” While price expectations have remained stable in the U.S., he cited the experience of Japan, “where low rates of inflation were not addressed.”

“A significant negative shock caused Japan to experience deflation, which has been quite difficult to reverse,” he said.

Rosengren said one reason U.S. inflation rate hasn’t fallen further “is because I think there have been inflation expectations that over the longer run the Federal Reserve will be successful in hitting the 2 percent target.”

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