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Beyond economy, asset buys also have fiscal benefits: Rosengren

Boston Fed President Eric Rosengren speaks during the Sasin Bangkok Forum July 9, 2012. REUTERS/Sukree Sukplang
Boston Fed President Eric Rosengren speaks during the Sasin Bangkok Forum July 9, 2012. REUTERS/Sukree Sukplang

NEW YORK (Reuters) - The Federal Reserve's massive asset purchases work to help not only the U.S. economy, but also the broader fiscal situation, a top Fed official said on Friday.

In a speech, Boston Fed President Eric Rosengren redoubled his defense of the U.S. central bank's policy of buying $85 billion in bonds per month, and he extended the argument to outline benefits to the government from the program.

The so-called quantitative easing program, known as QE3 because it's the third such effort by the central bank, reduces interest rates for the United States, and helps to lower the country's debt-to-GDP ratio, said Rosengren, a dovish Fed official who has a vote on the Fed's policy committee this year.

Further, he argued, the faster economic growth brought about by QE3 has the effect of bringing in more tax revenue. It also reduces government spending in areas such as unemployment insurance because such programs reduce joblessness, he said.

"We do well to also consider these benefits, and the costs of inaction, when evaluating policy," Rosengren said at a conference hosted by the University of Chicago Booth School of Business, according to prepared remarks.

The Fed is buying $45 billion in Treasury bonds and $40 billion in mortgage-backed securities per month in an effort to encourage spending and investment, and to help along the slow and erratic U.S. recovery from the 2007-2009 recession.

Though the buying is meant continue until there is a substantial improvement in the outlook of the labor market, some Fed policymakers are growing concerned that the central bank's balance sheet, now at $3 trillion, risks destabilizing financial markets or future inflation.

In a familiar argument, Rosengren also said that U.S. unemployment would be higher than the current 7.9 percent rate, and inflation would be even weaker than it is, absent the purchases.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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