Evans Says ‘Only Modest’ Pickup in Economy Warrants Federal Reserve Action

Federal Reserve Bank of Chicago President Charles Evans said signs of improvement in the economy are modest and the central bank should push forward with “substantial” monetary stimulus.

“The somewhat firmer tone of recent economic data suggest some welcome traction, but the data are not strong enough, or uniform enough, to assert that momentum for growth is building,” Evans said today in a speech in Lake Forest, Illinois. “The data shows only modest improvement in growth to rates that are near or just somewhat above the economy’s longer- run potential.”

Fed policy makers are divided on whether more steps will be needed to bolster an expanding U.S. economy. The unemployment rate fell to 8.5 percent in December, the lowest in nearly three years, according to the Labor Department. Employers last year added 1.64 million workers, the best year for the American worker since 2006. Even with the gains, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

With unemployment so high there will probably be downward pressure on prices, pushing inflation below the Fed’s goals, Evans said in his speech to the Rotary Club of Lake Forest and Lake Bluff, Illinois.

“The traditional course of action when inflation is below target and real output is expected to be below potential is to run an accommodative monetary policy,” Evans said. “I support such accommodation today. And I believe the degree of accommodation should be substantial.”

‘Lower End’

During 2013 and 2014 inflation will probably run “at the lower end” of 1.5 percent to 2 percent, Evans said. The Chicago Fed chief’s forecast for prices is similar to that of San Francisco President John Williams, who said yesterday he sees a “strong” case for new Fed purchases of mortgage bonds as inflation may fall below 1.5 percent this year.

“We might have to do more,” Evans said today in response to audience questions, referring to whether the Fed should increase accommodation. “We should do more,” Evans said, “even at a cost of slightly higher inflation than most central bankers would like.”

Action is warranted as the central bank continues to miss its mandate from Congress to foster maximum employment, Evans said.

“As I look at how you value our mandate we’re doing woefully poorly on the employment side and we’re not really doing that great on inflation but it’s certainly low,” he said. Any new central bank plan to buy bonds, if needed, could start with a commitment of $600 billion in purchases and be increased over time if necessary, he said to reporters after his speech.

Concern Deepened

The Standard & Poor’s 500 Index slipped 0.3 percent to 1,287.73 at 9:57 a.m. in New York, retreating from the highest level since July 29, as concern deepened that Europe’s debt crisis will stifle economic growth and Microsoft Corp. damped expectations for computer sales. The yield on the 10-year Treasury fell 4 basis points to 1.93 percent. A basis point is 0.01 percentage point.

Fed presidents rotate voting on the policy-setting Federal Open Market Committee. Evans does not vote in 2012 yet returns to voting in 2013. He dissented from the FOMC’s November and December meetings, preferring additional policy accommodation.

The Fed said last week that it would unveil policy makers own expectations for the path of interest rates at the central bank’s Jan. 24-25 meeting. Evans said he supported this step.

‘First-order Improvement’

“This is a substantial, first-order improvement in policy communications, and this greater clarity may have significant additional value for improving how the economy operates,” Evans said. “I have strongly supported the publication of our policy projections, and I strongly support the adoption of a more explicit consensus framework statement.”

The 53-year-old regional bank chief said this framework statement could use his proposal, first suggested last year, to keep the fed funds rate near zero until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net Timothy R. Homan in Lake Forest, Illinois at thoman1@bloomberg.net

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

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