Fed's Rosengren Says Unemployment Rate May Increase

By Christopher Condon and Steve Matthews

Oct. 15 (Bloomberg) -- The unemployment rate in the U.S. may rise as the economy in coming quarters expands at an anemic rate, Federal Reserve Bank of Boston president Eric Rosengren said.

``We're in a period where the economy is likely to grow quite slowly,'' Rosengren said today in a speech in Boston. Such a forecast ``would imply that unemployment is going to rise.''

The central bank is facing increasing evidence that the U.S. may already be in a recession, with San Francisco Fed President Janet Yellen saying yesterday that economic activity appears to be declining.

Labor Department figures showed Oct. 3 that payrolls fell by 159,000 in September, the biggest reduction in five years. The unemployment rate was 6.1 percent, an increase from 5 percent as recently as April.

``We need to get the housing market back on track,'' Rosengren said in response to an audience question. ``I'm hopeful that over the course of the next three quarters that will happen.''

Fed Chairman Ben S. Bernanke said yesterday the government's purchases of up to $250 billion in bank stakes and the guarantee of debt will revive confidence in finance and promote ``vigorous, healthy'' economic growth.

The Fed, European Central Bank and four other central banks cut interest rates last week in an unprecedented coordinated effort to prevent a freeze in credit markets from causing a global recession. The Fed reduced its benchmark rate to 1.5 percent.

Reduce Rates

Traders anticipate the Federal Open Market Committee will reduce rates again at an Oct. 28-29 meeting. Bernanke is scheduled to give his assessment of financial markets later today in a speech to the Economic Club of New York.

Rosengren, who doesn't vote on interest-rate policy this year, dissented in December in favor of a larger rate cut.

The Treasury is making equity investments in banks as part of a $700 billion rescue plan approved by Congress.

The federal tax rebate provided this year didn't offer the degree of stimulus expected by policy makers, Rosengren said. Any additional effort to spur economic growth should be ``more of an investment than an expenditure.''

The rout sparked by the collapse of the U.S. subprime mortgage market has cost financial institutions worldwide $637 billion in writedowns and losses since the start of 2007. Firms have raised $612 billion of capital in response.

Manufacturing in the U.S. contracted in September at the fastest pace since the last recession. The Institute for Supply Management's factory index dropped to the lowest level since October 2001, the Tempe, Arizona-based group reported Oct. 1.

The consumer price index fell in August for the first time in almost two years as declining fuel costs and a slowing economy cooled inflation. Prices increased 5.4 percent in the 12 months to August, after increasing 5.6 percent for the 12-month period ending in July for the biggest gain since January 1991.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net