The housing market will not be the U.S.’s savior in the economic recovery – but on the bright side, inflation will not be its downfall, according to Eric Rosengren, president of the Federal Reserve Bank of Boston.

Economists need not fear that monetary policy will trigger uncontrollable inflation, he said, addressing the New England Mortgage Expo at MGM Grands at Foxwoods on Friday. Indeed, because housing will remain weak and joblessness high, the Federal Reserve must continue to maintain its stimulative monetary policy.

Rosengren predicted a 3.5 percent to 4 percent growth rate for 2011, largely because of the puny housing market. Housing has traditionally been a major factor in economic recoveries, but the lack of available credit, including far-tighter lending standards, has hobbled the market’s resurgence.

The prime market is much diminished, he noted, and the subprime market is dormant entirely. In 2006, for example, about 15 percent of purchase loans were to borrowers with credit scores below 625; by 2010, that number had fallen to 3.5 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," he said.

And if housing isn’t going to be the engine of the recovery, monetary policy must step in to stimulate the financial system. The Fed has drastically increased the purchase of assets and expanded its balance sheet, a move which injects more reserves into the banking system. As the economy recovers and banks use these reserves to ramp up lending activity, some economists predict the rapid expansion will push inflation up – a contention Rosengren disagreed with.

When banks are able to expand their lending, the Fed is equally able to pull back those reserves from the banking system.

"The fear that our large balance sheet and the large stock of reserves in the banking system will cause inflation – either now or down the road – seems misplaced to me," he said.

But Rosengren did acknowledge that not all prices are holding steady. Demand from emerging markets has pushed up energy prices, which in turn creates yet more pressure on American households as they try to pay the bills, further hurting their ability to support the economy by spending money elsewhere.

Despite the small positive signs, the reserve president reiterated that the economy still suffers from excess capacity, and that unemployment will likely remain high for the near future.