Bloomberg News

Fed’s Evans Seeks Clearer Rate Pledge or ‘Ambitious’ Asset Buys

February 07, 2012

Feb. 2 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the central bank needs a clear low- rate commitment or a third round of purchases of Treasuries and mortgage bonds to further stimulate a still struggling economy.

People outside the Fed have “mentioned that maybe you needed to do well over a trillion dollars in asset purchases in order to begin to move things,” the regional chief told reporters today during a meeting at the bank. “I don’t have a particular number in mind, but it would be more ambitious than most numbers being bandied about.”

Evans reiterated his view that the central bank should keep the benchmark U.S. interest rate near zero until unemployment falls below 7 percent or medium-term inflation rises above 3 percent, and underscored his position as the Fed’s most vocal proponent for easing. Chairman Ben S. Bernanke said last week the Fed was considering easing policy further to sustain the recovery after the Fed extended its pledge to keep borrowing costs low until at least late 2014.

“My preferred policy would be one where we are even clearer in what our intentions are on the federal funds rate and monetary policy,” said Evans, 54, who was the only member of the policy-setting Federal Open Market Committee to dissent in favor of more stimulus in 2011.

“If the committee were not able to somehow refine our forward guidance in a way that I think would impart more monetary stimulus than what we currently have, I would favor more asset purchases,” he said. “I would be very aggressive over a six-month period of time” and “if it couldn’t be all in MBS, then I would add some Treasuries in there,” Evans said, without providing a specific timetable for when the purchases would begin. He was referring to mortgage-backed securities.

Jobs Report

A Labor Department report will show tomorrow that the unemployment rate held at 8.5 percent in January, according to the median estimate of 79 economists surveyed by Bloomberg News. The jobless level has remained stuck above 8 percent since February 2009.

The Standard & Poor’s 500 Index rose 0.04 percent to 1,324.65 at 11:46 a.m. in New York, after Fed Chairman Ben S. Bernanke said the U.S. economy has shown signs of improvement while remaining vulnerable to shocks. European stocks climbed for a third day as a report showed that U.S. jobless claims dropped more than economists had estimated.

Impediments Seen

Other Fed officials have also warned that the employment rebound may be slow. New York Fed President William C. Dudley said Jan. 27 he sees “significant impediments to a robust recovery” as the U.S. economy faces risks “skewed to the downside.”‘

“Unemployment, both nationally and locally, is likely to remain unacceptably high for some time,” Dudley said. “It is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012.”

In the meantime, some have warned about the risk of stoking inflation. Richmond Fed President Jeffrey Lacker dissented from the central bank’s Jan. 25 pledge to keep interest rates low through late 2014. The Fed may need to raise rates before then to prevent an increase in inflation, he said last week.

‘Economic Expansion’

“I expect that as economic expansion continues, even if only at a moderate pace, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures,” Lacker said in a statement on the Richmond Fed’s website.

Philadelphia President Charles Plosser, a non-voting member on the FOMC this year, said Jan. 30 in an interview on CNBC that the Fed may need to raise its benchmark borrowing cost as early as this year. He added that last week’s pledge to keep rates low wasn’t a firm a commitment.

Evans told reporters today that he isn’t concerned about the risk of disinflation and that the normal channels of monetary policy are “clogged.” He also said that while the economic data are better now than they were around August and September of 2011, the unemployment gap is “very large.”

If the Fed tied its low-rate pledge to unemployment falling below 7 percent, “everybody would understand that we’re going to be in this for as long as it takes,” he said.

The regional chief, who is not a voting member on the policy-setting FOMC this year, has led the Chicago Fed since September 2007 and has worked at the bank since 1991. The district bank head represents a region that includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin.

--Editors: Kevin Costelloe, Chris Wellisz

To contact the reporters on this story: Aki Ito in San Francisco at aito16@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

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


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