Bloomberg News

Fed’s Evans Says U.S. Faces ‘Massive’ Job, Output Shortfall

October 17, 2011

(Updates with quotes in seventh, 16th paragraphs.)

Oct. 17 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the U.S. faces “massive shortfalls” in output and job creation and called for policy steps to ensure the Fed meets its mandate to promote maximum employment while limiting inflation.

The 53-year-old regional bank chief reiterated his proposal, initially unveiled in a speech last month, to keep the target for the benchmark U.S. interest rate near zero until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent. He said he would support more asset purchases if those objectives aren’t reached.

“Some may find such a policy proposal to be hard to understand, or even risky,” he said today in a speech in Detroit. “But these are not ordinary times.”

The remarks place the Chicago Fed president among the Federal Open Market Committee members who, according to minutes of the FOMC’s gathering in September, wanted to keep further asset purchases as an option to boost a flagging recovery. Evans backed the committee’s Sept. 21 decision to push down longer- term rates and its Aug. 9 commitment to keep the overnight lending rate between banks near zero through at least mid-2013.

Adding triggers to the Fed’s statement "should enable us to make progress toward our mandated goals," the Chicago Fed president said at a dinner held by the Michigan Council on Economic Education. "If this progress is too slow, then we should move forward with increased purchases of longer-term securities."

‘Huge Hit’

“If we sit on our hands as the economy withers relative to our mandate, then we could take a huge hit to our credibility, akin to what happened to our credibility following the devastating mistakes of the 1930s,” when the Fed kept monetary policy too restrictive during a time of weak loan demand and reluctance among lenders to take risks, he said.

Still, “we can only do so much,” Evans said in response to questions after his speech. He added that inflation pressures are more benign than some people have depicted, and “some mortgage relief” would be a “big help” to the U.S.

Data released since the Sept. 20-21 meeting show American employers added 103,000 jobs in September, easing concern the economy is tipping into another recession. Retail sales in September rose by the most in seven months, according to Commerce Department figures.

By contrast, confidence among consumers unexpectedly dropped this month and purchases of new homes declined to a six- month low in August.

Stocks Fell

The Standard & Poor’s 500 Index slid 1.9 percent to 1,200.86 at the close in New York, while the yield on the 10- year Treasury note declined nine basis points to 2.16 percent. A basis point is 0.01 percentage point.

Evans, unlike most of his Fed colleagues, has repeatedly stated a willingness to tolerate higher inflation as long as it pushes down the jobless level. The Chicago Fed president said the central bank might want to also consider “reevaluating” its progress toward policy goals at each FOMC meeting, along with the rate of asset purchases.

Minutes of the FOMC’s September gathering said a number of participants saw large-scale asset purchases as “potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”

Meeting Minutes

Most FOMC participants favored providing the public with more information on the central bank’s goals and how those objectives influence the Fed’s decisions, according to minutes of the meeting, released on Oct. 12.

Fed officials also “saw advantages” to tying the Fed’s near-zero interest rates to more specific changes in the economy, according to the meeting minutes.

The committee decided at last month’s gathering to replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs. Three officials dissented. Policy makers also chose to reinvest maturing housing debt into mortgage-backed securities, partly to keep the Fed’s Treasury holdings from getting too large.

The Fed’s so-called "Operation Twist" plan is a "very important" way of demonstrating a willingness to be accommodative, without expanding the central bank’s balance sheet, Evans said. "If it’s not doing enough, we need to do more."

Evans has led the Chicago Fed since September 2007 and is one of only two regional Fed presidents who vote on the FOMC every other year, along with Sandra Pianalto, president of the Federal Reserve Bank of Cleveland.

The regional bank chief has been among the FOMC’s strongest supporters of monetary stimulus since last year. He represents a five-state region that includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin. Iowa has one of the lowest unemployment rates, at 6.1 percent as of August, while Michigan has one of the highest, at 11.2 percent.

--Editors: James L Tyson, Ken McCallum

To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net


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