Bloomberg News

Fed's Evans Urges Near-Zero Rates Until 6.5% Jobless

November 27, 2012

Federal Reserve Bank of Chicago President Charles Evans said the central bank should keep interest rates near zero until unemployment falls to 6.5 percent or below as long as inflation is under 2.5 percent, aligning himself more closely with other Fed officials.

Evans previously had proposed 7 percent for the jobless rate and 3 percent for inflation.

“I now think the 7 percent threshold is too conservative,” Evans said in the text of prepared remarks given in Toronto today. “I am aware that the 3 percent threshold makes many people anxious” as an inflation measure.

With a benchmark interest rate near zero since 2008, the policy-setting Federal Open Market Committee has been discussing new ways to signal its intentions to provide more economic stimulus. Evans’ shift today underscores the FOMC’s progress toward a consensus, with officials calling for different levels of economic improvements even as a growing number endorse the approach of tying policy to indicators.

“We have the ability to go even further in reassuring financial markets and the general public that policy will stay appropriately accommodative and that such steps would provide the stimulus to growth,” the Chicago Fed chief said at the C.D. Howe Institute Benefactors’ Lecture and Dinner.

Fed Guidance

Evans was the first Fed president to argue for a clarification of the central bank’s guidance using the unemployment rate and inflation, saying that clearer expectations of its policy would further lower borrowing costs. The FOMC currently says it anticipates keeping its benchmark rate exceptionally low through at least mid-2015, an extension from what was mid-2013 at first and was later moved to late 2014, without specifying any economic numbers.

Minneapolis Fed chief Narayana Kocherlakota has called for near-zero rates until unemployment falls below 5.5 percent as long as inflation remains below 2.25 percent, while Boston’s Eric Rosengren has said he prefers a benchmark of 6.5 percent.

Fed Vice Chairman Janet Yellen on Nov. 13 said she is “strongly supportive” of the idea of thresholds without endorsing any set of numbers.

In response to a question from the audience, Evans said today that he saw no need to begin tightening even if the jobless rate fell below 6.5 percent, provided that the inflation outlook remained below the Fed’s target.

No Consensus

He added that FOMC participants have yet to reach a consensus on how best to communicate the committee’s intentions to the public. Among the challenges central bankers face is that no two sets of numbers can provide a comprehensive outlook on the economy, he said.

Employers added 171,000 jobs to payrolls in October and the unemployment rate rose to 7.9 percent from 7.8 percent the month before, Labor Department figures show. Inflation as measured by the personal consumption expenditures index accelerated to 1.7 percent for the year ended in September. The Fed has set a target of 2 percent inflation.

Richmond Fed chief Jeffrey Lacker said on Nov. 20 that he opposes a proposal to tie central bank stimulus to the U.S. unemployment rate because such a move may spur inflation.

Central bankers still need to resolve “a number of practical issues” before a decision on quantitative thresholds can be made by the FOMC, minutes of the Oct. 23-24 gathering showed.

Vocal Advocate

Evans, who isn’t a voting member of the FOMC this year, has been among the most vocal advocates for further stimulus within the Fed. He was the only member to dissent in favor of more easing in 2011.

Clarifying its policy outlook isn’t the only way the Fed has been trying to bolster growth. The central bank voted last month to keep buying $40 billion in mortgage bonds per month.

The Fed would need to see monthly increases in payrolls of at least 200,000 for about six months before it ends those purchases, Evans said today. The economic expansion would also need to be faster than what’s seen now, “noticeably above the economy’s potential rate of growth,” he said. That may not happen until the end of 2013, Evans told reporters before his speech today.

Officials are next scheduled to meet Dec. 11-12, when they may expand the purchases to include Treasuries as a separate stimulus measure expires at the end of the year. Through the so- called Operation Twist program, the central bank has been swapping $45 billion of short-term Treasuries a month for longer-term debt.

Current Pace

It’s important to maintain the current pace of bond purchases -- with $40 billion in mortgage-backed securities and $45 billion in longer-term government debt -- even after the expiration of Operation Twist, Evans added to reporters.

Evans, 54, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. Fed presidents rotate voting on monetary policy with Evans voting next year.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

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


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