Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank should keep policy accommodative to support the economy while lawmakers reduce government spending to tame the country’s budget deficit.
The government should put “in place policies that slowly but surely bring the prospects of future revenues into balance with future spending,” Evans said in remarks in Hong Kong today. “Under this scenario, monetary policy has an important contribution to make.”
The Federal Open Market Committee last month announced measures to further support the U.S. economy, saying the central bank would expand its bond-purchasing program and link policy to economic indicators for the first time. After President Barack Obama and lawmakers averted $600 billion in spending cuts and tax increases that had been scheduled to start this month, Republicans are calling for a reduction in federal expenditures as a fight looms over raising the government’s borrowing limit.
“Too much austerity too soon could be very damaging to near- and medium-term growth,” Evans said at the Asian Financial Forum. In a fragile economy, sudden spending cuts and tax increases “could cause longer-lasting damage if they result in lower growth in the physical productive capital stock and even more time out of work for the long-term unemployed, whose job skills would be further eroded.”
The compromise Obama and lawmakers reached this month raised income-tax rates for couples with annual income above $450,000 while extending tax cuts for lower incomes, and delayed automatic spending reductions until March 1.
Evans, who votes on the policy-setting FOMC this year, has been one of the most outspoken advocates within the Fed for stimulus. He was the first official to propose linking the central bank’s benchmark interest rate to economic thresholds, a policy that was adopted by the FOMC at its Dec. 11-12 meeting.
At that time, the Fed said that it expected to keep interest rates low as long as the unemployment rate is above 6.5 percent, provided that inflation is projected to be no more than 2.5 percent. Previously, the central bank said it would keep rates near zero through at least mid-2015.
“Given more explicit conditionality, markets can be more confident that we will provide the monetary accommodation necessary to close the large resource gaps that currently exist,” Evans said today. “Also, clarifying conditionalities can help households and businesses better plan for the future, and so boost the effectiveness of our current policies.”
Evans, responding to questions after his remarks, said he expects interest rates to stay low until 2015. If the U.S. adds 200,000 jobs per month for several months, that would be an indicator that the Fed could end asset purchases in line with its pledge to continue until it sees “substantial improvement” in labor markets, he said.
“That would be consistent with substantial improvement,” Evans said. “That’s going to be on the order of 1 million to 1.5 million jobs over the next six months to a year. That would be indicative that we could stop.”
In December, the U.S. central bank also said it would start buying an additional $45 billion per month in Treasuries as part of its open-ended bond-buying program. The expansion was meant to offset the end of Operation Twist, in which the Fed swapped short-term Treasuries for longer-term bonds.
Evans had dissented twice in 2011 in favor of adding stimulus, and was an early advocate for a third round of quantitative easing that the Fed announced in September 2012. He became president of the Chicago district bank in 2007.
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