A Boston official added his voice on Friday to the debate over two policy issues at the Federal Reserve: First, how soon should the Fed begin unwinding the massive lending programs it used to stave off economic disaster?  And second, how great is the inflation danger posed by all that money the Fed put into the economy?

Boston Federal Reserve Bank President Eric Rosengren answered unequivocally: 1) later, and 2) not much.  

In a speech to the Greater Boston Chamber of Commerce, he warned against removing government support too soon: “It is important that monetary and fiscal policy continue to support the economy until private-sector spending has resumed, and until we are confident that the recovery will continue once the programs that have supported the economy over the past year are removed.”

And in Rosengren's analysis, we're a long way from that level of confidence.   

“Despite the very positive signs we are seeing, the economic recovery remains fragile and quite capable of falling short of the more positive expectations and degrees of confidence now reflected in financial markets," he said.

The economy simply isn't going to grow fast enough or strong enough to improve labor-market conditions any time soon.  That's the root of the disagreement about inflation.  Rosengren pointed to an unusually high divergence in inflation forecasts.  The top 10 Blue Chip forecasts average 3.3% in Q4 2010, while the bottom 10 predict just 0.7% inflation then.

“The forecasters that are predicting relatively low inflation over the next several years,” he said, highlight "excess capacity in the economy.”  The high-inflation forecasters point to the dramatic growth of the Fed balance sheet.

The danger Rosengren sees is not inflation, but disinflation -- and he cites the mistakes which led to the “lost decade” of deflation in Japan.  It took the Bank of Japan four years to get to where the Fed got in months -- near-zero rates and massive credit aid.  It began to work, but as soon as there were tentative signs of recovery “and because of concerns with fiscal deficits, the Japanese government announced a tax increase in 1997. Shortly thereafter GDP fell sharply and Japan went into a period of deflation that persisted for much of the past decade”

He doesn't discuss it, but the same premature cutoff of support has also happened in this country.  Fearing an incipient bubble in 1937, the Roosevelt administration raised taxes and the Fed raised rates, cutting off a slow but steady recovery that had been under way since the bottom in 1932.

That is the primary danger Rosengren sees for Fed and fiscal policy now -- a too-early retreat.  “It's as important to keep inflation from getting too low as it is to keep it from getting too high.”

It's essential for the Fed ultimately to remove its extraordinary policies, but some are already winding down and there is plenty of time to unwind the others, according to Rosengren.  And that's virtually the same analysis Fed vice-chairman Donald Kohn gave earlier this week: Calm down, we can pull the stimulus back out of the economy -- and there's plenty of time to do it.