Fed's Evans Says Central Bank Needs Several Large Purchases for Price Goal
Federal Reserve Bank of Chicago President Charles Evans said the central bank would need to buy securities on a large scale several times to carry out his preferred strategy of aiming to raise inflation temporarily.
“Price-level targeting in the current environment would call for a series of large-scale asset purchases to recover the shortfall in inflation,” Evans said in a speech today in Evanston, Illinois. The regional central bank chief on Oct. 16 called for plotting a path for the level of consumer prices to keep inflation from falling.
Evans and his colleagues are considering unorthodox monetary tools as they struggle with unemployment persisting near a 26-year high and inflation the Fed says is below levels consistent with long-term economic growth. Fed Chairman Ben S. Bernanke said Oct. 15 that there appears to be a case for further easing of monetary policy to aid growth.
“For many, my proposal will be a hard pill to swallow,” Evans said at a breakfast for local civic leaders. “Central bankers generally loathe the idea that even a temporarily higher inflation rate could be beneficial for, or consistent with, price stability over the longer term.” He cited the 1980s victory over high inflation by former Fed Chairman Paul Volcker.
“The current circumstances, however, require that we fight a different battle -- namely, the extraordinary instance of liquidity trap conditions not seen since the 1930s,” Evans said. In a liquidity trap, savings outstrip demand for investment, while interest rates can’t be lowered below zero, he said. The Fed cut its benchmark rate almost to zero in December 2008.
More Accommodation
Evans echoed remarks from his Oct. 16 speech in which he said the U.S. needs “much more” monetary accommodation in the face of high unemployment and inflation that’s too low.
Responding to audience questions today, he said additional Treasury purchases can lower long-term interest rates. The Fed can also enhance its pledge to keep interest rates low for an “extended period” by saying the central bank will commit to keep borrowing costs there until inflation starts to move back to a specified price-level path, Evans said.
Evans told reporters after the speech that asset purchases “would have to be meaningful” in size while declining to say the amount he would support.
The Fed bought $1.7 trillion of mortgage debt and Treasuries in a program that ended in March, resulting in a balance sheet that’s now about $2.3 trillion. The central bank has purchased an additional $55 billion of Treasuries since August to keep its asset holdings stable and avoid what officials say is a “passive” tightening of credit.
Inflation Boost ‘Foolish’
Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said last week that a strategy of trying to boost inflation would be “foolish.”
Fed policy makers, including Evans, will present updated projections for growth, inflation and unemployment at the Federal Open Market Committee’s next meeting Nov. 2-3; they will be disclosed in minutes of the session to be released Nov. 24.
Bernanke said last week the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”
Expand Purchases
Analysts at Goldman Sachs Group Inc. and other firms expect the FOMC to expand asset purchases at its next meeting. Goldman says the program may start at $500 billion in Treasuries and eventually surpass $1 trillion.
Evans said he expects second-half U.S. growth of 2 percent to 2.5 percent and a 2011 expansion of 3 percent to 3.5 percent. Unemployment, which was 9.6 percent in September, is likely to be at 8 percent or higher at the end of 2012, Evans said.
While some economists say a skills mismatch between unemployed workers and employers will make it difficult to lower joblessness to pre-recession levels, Evans said the lack of industries needing “hard-to-find skilled workers,” as well as the “continued presence of disinflationary pressures,” mean there will still be a “very large amount of resource slack” with 8 percent unemployment.
‘Sitting’ on Cash
Companies are “sitting on the cash generated by profits and the funds raised in capital markets,” Evans said. While some business contacts attribute their reluctance to spend on uncertainty over government and regulatory policies, “most admit they would increase spending if demand were stronger,” he said.
The U.S. economy probably expanded at a 1.9 percent annual pace in the third quarter and will have 2.1 percent growth in the fourth quarter, based on the median estimates of analysts surveyed by Bloomberg News this month. The economy will grow 2.4 percent next year, according to the survey.
Evans, 52, has led the Chicago Fed since September 2007 and doesn’t vote on the rate-setting FOMC this year. He votes every other year on the FOMC, as does Cleveland Fed President Sandra Pianalto; the New York Fed president votes at every meeting, while the other nine regional chiefs vote every three years.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; John Lippert in Chicago at at jlippert@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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