Fed Has Less Need for Extra Stimulus as Economy Gains Monthly, Evans Says

The Federal Reserve has less need to support an improving economy beyond the $600 billion Treasury purchase plan already in place, and any changes to the central bank’s stimulative policies should be considered some time after the program ends, said Charles Evans, president of the Fed’s regional bank in Chicago.

“The economy definitely continues to improve each month,” Evans, 53, said today in a meeting with reporters at the bank. “It would be natural to expect that there would be some period of time between when the $600 billion is completed and an assessment of a change” in the trajectory of policy.

The regional bank chief’s comments buttress the position taken last week by Fed officials, who said the economy is on “firmer footing” and signaled they’re unlikely to expand the bond purchase plan. The jobless rate unexpectedly fell to 8.9 percent in February, the lowest in almost two years, and employers added 192,000 jobs in a sign of growing confidence in the recovery.

“Each quarter, there seems to be more momentum going into our last FOMC meeting,’ said Evans, who votes on the Federal Open Market Committee this year. ‘‘I personally don’t see as many needs for a further amount as I probably thought last fall. Last fall, I thought 600 was a good start and we would evaluate conditions at the appropriate time.”

Photographer: Seokyong Lee/Bloomberg

Charles Evans, president of the Federal Reserve Bank of Chicago. Close

Charles Evans, president of the Federal Reserve Bank of Chicago.

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Photographer: Seokyong Lee/Bloomberg

Charles Evans, president of the Federal Reserve Bank of Chicago.

Mortgage-Backed

A decision to end the reinvestment of proceeds from maturing mortgage-backed securities “could clearly be a first step, a very modest one” toward tightening monetary policy, “which could then perhaps not be followed very quickly with other restraining moves,” he said. “On the other hand, if the trajectory of the economy or inflation changes in a way that our current policy is not prepared to handle, then you’d want to take something firmer, perhaps in conjunction with introducing other tools.”

Data released this month support the central bank’s upgraded view. The unemployment rate has dropped by almost 1 percentage point since the Fed announced the $600 billion program in November.

Payrolls have increased by an average 134,000 a month for the past five months. Evans said he now expects unemployment to drop to 7.5 percent by the end of next year, compared with a previous forecast of 8 percent.

Still, other figures show some parts of the economy floundering. Purchases of new U.S. homes unexpectedly fell in February to the slowest pace on record and housing starts plunged, signaling the recovery faces obstacles.

‘Right Decision’

“In this environment, I still think accommodation is the right decision,” Evans said. “Our current low rates continue to be appropriate and will continue to be appropriate for an extended period.”

U.S. stocks have gained since November, with the Standard & Poor’s 500 Index rising more than 9 percent. The S&P 500 was up 0.7 percent at 1,318.98 at 12:27 p.m. in New York today.

Labor market conditions are “improving gradually,” and the recent rise in commodity prices should have only a temporary effect on overall inflation, the FOMC said after its March 15 meeting in Washington.

Evans said today the Fed is “very mindful” that prices are moving higher.

Fed officials have purchased $1.7 trillion of mortgage debt and Treasuries through March 2010 to pull the U.S. out of the recession. The $600 billion plan is the central bank’s second large-scale round of Treasury purchases, also known by economists and investors as “QE2.”

‘Exceptionally Low’

The central bank also has left its benchmark federal funds rate in a range of zero to 0.25 percent since December 2008, and pledged for the past two years to keep it “exceptionally low” for an “extended period.”

“How quickly would I personally think we should move in a different direction?” Evans said. “I wouldn’t think it would be the next day or right away.”

“For me, that means I’m going to continue to look at how inflation and the economy are performing. I would think any further adjustments in policy would be some period of time after we stop the $600 billion” program, according to Evans.

Evans has led the Chicago Fed since September 2007 and is one of only two regional Fed presidents who vote on the FOMC every other year, along with Cleveland Fed President Sandra Pianalto.

The regional bank chief has been among the FOMC’s strongest supporters of monetary stimulus since last year. He represents a five-state region that includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin. Iowa has one of the lowest unemployment rates, at 6.1 percent, while Michigan has one of the highest, at 10.4 percent.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

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

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