eric s rosengren : considering the routes to a policy destination speech by mr eric s rosengren, president and chief executive officer of the federal reserve bank of boston, at the money marketeers of new york university, new york, 5 may 2010. accompanying figures to this speech can be found on the federal reserve bank of boston ’ s website. * * * i am happy to be with you this evening. i appreciate your warm welcome, and your invitation to join the long and distinguished line of individuals who have addressed the money marketeers over the decades. 1 i have always taken some delight in yogi berra quotes. as a red sox fan, i could always hope that garbled metaphors by the legendary yogi would be as confusing to the players as they were to the public, which might translate into opportunities when the red sox came to new york. alas, in the early going this season it is not the yankees that seem confused. yogi berra was not only a great catcher and manager, but also an astute observer of the obvious. if he were to summarize this talk he might suggest a title like “ knowing your destination is a good start in getting where you are going ” or some other derivation of what i believe is his actual quote : “ you ’ ve got to be very careful if you don ’ t know where you are going because you might not get there. ” when setting monetary policy, it is very important to have a clear idea of where you want the economy to go. and fortunately, there is now much more transparency about the federal open market committee ’ s ( fomc ’ s ) expected destination, because the fomc releases its long - term projections for inflation and unemployment. unfortunately, however, actually reaching our desired destination will prove challenging and involve choices, as i will discuss this evening. at our january meeting, the central tendency of the fomc members ’ long - run projections for unemployment was 5. 0 to 5. 2 per cent, and for inflation ( measured by the personal consumption expenditures price index or pce ) was 1. 7 to 2. 0 per cent. at present, both unemployment and inflation diverge significantly from these longer - term goals, with the march unemployment rate at 9. 7 per cent, and core pce inflation over the past year at 1. 3 per cent. in such circumstances, one might think that the current path of monetary policy would be particularly straightforward. unfortunately, just

##ime market bis central bankers ’ speeches is dormant. 2 the left side of figure 9 shows the distribution of all home - purchase loans by credit score in 2006 ( before the financial crisis ) and in 2010. 3 it is striking how the distribution of purchase mortgages has changed. credit standards have tightened, as evidenced by a shift to borrowers with higher credit scores. given what has happened to housing prices, and unemployment, lenders are presumably more cautious in lending. far fewer loans are going to borrowers with credit scores below 625, and many more purchase loans are going to borrowers with credit scores above 750. in 2006, about 15 percent of the purchase loans were to borrowers with credit scores below 625, but by 2010, this fraction had fallen to only 3. 5 percent. the decline in loans to borrowers with sub - 625 scores has not completely resulted from the decline in subprime lending. the right side of the figure shows the credit - score distributions among prime loans, and a similar rightward shift in the distribution is apparent. from 2006 to 2010, the share of prime purchase loans going to borrowers with sub - 625 credit scores fell from 8. 5 to 3. 5 percent. at the same time, the share of prime purchase loans going to borrowers with scores above 750 rose from about 35 percent to about 41 percent. while i am certainly not advocating going back to the loose lending standards of, say, 2006, i think we should be aware of how changes in the distribution have implications for the housing recovery. in particular, i would suggest that current lending standards are another reason the housing sector ’ s role in the recovery is likely to be weaker than usual. in addition to the challenge of availability of credit to borrowers with low credit ratings, housing has another issue. both the homeowner and rental vacancy rates are quite high, as shown in figure 10 – although there has been recent improvement in these rates, and hopefully the trend is now downward. high vacancy rates, of course, place downward pressure on home prices and rental rates, and serve as another headwind to a housing recovery. so again, all in all and despite some improvement in factors fundamental to a housing recovery, i expect that housing will not provide as much support to this recovery as it has in previous ones. but now i ’ d like to turn to the second question, and perhaps leave you feeling a bit less discouraged when we ’ re through. question 2 : inflation, policy,