Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank should move more forcefully to lower the unemployment rate, warning of long- term economic damage should high joblessness persist.
“Failure to act aggressively now will lower the capacity of the economy for many years to come,” Evans said in the text of remarks today in Bangkok. “I support using our balance sheet to provide additional accommodation.”
Recent reports have signaled the U.S. recovery is weakening, with figures showing last week that employers added fewer workers to payrolls than economists forecast and the unemployment rate stayed at 8.2 percent. Evans and Boston Fed President Eric Rosengren, who spoke earlier at the same conference in the Thai capital, indicated in their prepared remarks little optimism hiring will accelerate soon.
“I expect that we will face unemployment well above sustainable levels for some time to come,” Evans said. Fed policy makers consider a jobless rate of 5.25 percent to 6 percent to be consistent with a fully employed labor market over the long term, he said.
Rosengren said employment growth has “slowed fairly noticeably,” citing “significant excess capacity.”
The U.S. central bank bought $2.3 trillion of securities in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy. Speaking to reporters after his speech, Rosengren called the June job figures “disappointing” and said a third round of easing, known as QE3, is possible depending on economic data.
The Fed’s policy-setting Federal Open Market Committee last month expanded a program intended to lower longer-term borrowing costs, adding that it’s prepared to act further to promote sustained employment gains.
“Our action in June that continued our Maturity Extension Program was useful,” the Chicago Fed chief said at the Sasin Bangkok Forum. “But I would have preferred an even stronger step, such as the purchase of more mortgage-backed securities.”
Evans repeated his call for the Fed to commit to low interest rates until the unemployment rate falls below 7 percent or inflation rises above 3 percent. He added that targeting the level of nominal income would be “an appropriate policy choice,” while adding that he recognizes the “difficult nature” of such an approach.
The FOMC expanded a program known as Operation Twist by $267 billion through the end of the year in its June 19-20 meeting, and officials lowered their forecasts for growth and employment. Chairman Ben S. Bernanke said after the meeting that the Fed stands ready do more if growth falters, saying that additional asset purchases are among the steps the central bank would consider.
A Labor Department report released July 6 may add to the case for more stimulus. The unemployment rate has stayed above 8 percent since January 2009, the longest stretch above that level since 1948. Payrolls increased by 80,000 in June, the figures showed, compared with a projected 100,000 rise based on the median estimate in a Bloomberg News survey.
The Fed’s mandates to promote stable prices and maximum employment are equally important, meaning policy makers in the current environment should be willing to risk some price increases if bigger job gains could be achieved, Evans said today.
“If we are missing our employment mandate by a large mark, but are close to our inflation target, then we should be willing to undertake policies that could substantially reduce the employment gap even if they run the risk of a modest, transitory rise in inflation that remains within a reasonable tolerance range,” he said.
Evans, 54, today said the bond market isn’t anticipating rising inflation in the U.S. any time soon.
“Low long-term Treasury rates support the view that markets are looking for only modest economic growth with low inflation, and there is a high degree of caution out there -- which itself is an important factor holding back economic activity today,” Evans said.
Evans, who doesn’t vote on policy this year, has been among the most vocal proponents within the Fed for additional monetary stimulus. He was the only member of the FOMC last year to dissent in favor of more accommodation.
In his prepared remarks, Rosengren of the Boston Fed said hiring in the U.S. has recently slowed “fairly noticeably” and warned that consumer demand may weaken further in a “self- fulfilling dynamic.”
“The slowdown in employment growth not only hinders our ability to get to full employment, but also weakens the consumer side of the economy even more, going forward,” said Rosengren, 55. The presidents of the Boston and Chicago Fed district banks are scheduled in a rotation to be voting members of the FOMC next year.
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