Federal Reserve Bank of Chicago President Charles Evans said he is calling for “increasing amounts of policy accommodation” to reduce a 9 percent unemployment rate that’s far above the Fed’s objectives.
“We ought to be behaving as if there’s a very big problem out there,” Evans said in New York today at the Council on Foreign Relations.
Evans, 53, voted against the Federal Open Market Committee’s November decision to maintain its level of stimulus, casting the U.S. central bank’s first dissent in favor of further easing since December 2007. He said today that his position is “unusual” among policy makers.
“I’m finding myself sufficiently outside” of the “consensus that I thought I had to publicize that,” Evans said. His vote contrasted with those by three of his colleagues. Dallas Fed President Richard Fisher, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis earlier this year dissented against further easing in August and September.
The FOMC pledged in August to keep its target interest rate near zero at least until mid-2013, and policy makers agreed on a plan in September to cut borrowing costs by lengthening the maturity of the Fed’s bond portfolio in a program known as Operation Twist.
Fed Chairman Ben S. Bernanke said on Nov. 2 after a two- day FOMC meeting that the central bank may take new steps to boost growth, such as buying mortgage bonds or changing the way it communicates its policy goals to the public. Bernanke warned that economic improvement is likely to be “frustratingly slow,” with policy makers predicting a 1 percentage point drop in the jobless rate to about 8 percent over two years.
San Francisco Fed President John C. Williams said today the central bank may need to embark on additional asset purchases in the face of stubborn unemployment, moderate growth and undesirably low inflation.
“Additional monetary policy accommodation -- either in the form of additional asset purchases or further forward guidance on our future policy intentions -- may be needed to bring us closer to our mandated objectives of maximum employment and price stability,” Williams said according to the text of a speech in Scottsdale, Arizona.
At the same time, St. Louis Fed President James Bullard urged policy makers to think twice before deciding on further large-scale purchases of securities because they could bring the threat of higher inflation.
“Outright asset purchases are a potent tool and must be employed carefully,” Bullard said in a speech today in St. Louis. “Increases in the size of the balance sheet entail additional inflationary risks if accommodation is not removed at an appropriate pace.”
Evans, who represents a five-state district with some of the highest U.S. jobless rates, reiterated his proposal in September that the Fed should keep its current commitment to record-low interest rates until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent. The unemployment rate has been stuck near 9 percent or above since April 2009.
Evans forecast a “good case” of U.S. economic growth of 2.5 percent in 2012 and “maybe” 3 percent in 2013. “That’s not going to be enough to generate additional employment sufficient to bring the unemployment rate down,” he said.
While the Fed should be “willing to tolerate higher inflation” than its goal of about 2 percent, “I’m not exactly advocating that we go for that,” Evans said. Inflation pressures are “somewhat muted,” he said.
The first step policy makers should take would be to use communications to “firm up” their guidance on how long they plan to keep interest rates near record lows, which would likely extend expectations beyond the current mid-2013 pledge, he said. Fed officials should then consider how additional asset purchases could “further firm our commitment,” Evans said, adding he would be “very interested” in the possibility of buying additional mortgage-backed securities.
Fisher yesterday voiced a more optimistic view of the economy. He said in an interview at Bloomberg’s headquarters in New York that the U.S. is “poised for growth” going into next year and that he sees a declining likelihood the central bank will need to ease further.
“The direction we’re moving in is positive,” Fisher said, forecasting gross domestic product would expand by 2.5 percent to 3 percent in the fourth quarter, “gradually getting better as we go through time.”
“The thing that I worry about is waking up and everyone being complacent that” the economy is going to “muddle through,” Evans said. “We do need leadership” and “I have been in a very small manner trying to advance this by saying I think we should be willing to accept slightly above target inflation,” he said.
“This is a very hard thing for a central banker to accept, let alone advocate,” Evans said. “These are extraordinary times that require extraordinary actions.”
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