Federal Reserve Bank of Chicago President Charles Evans, a voter on policy this year, said the Fed may buy a total of $1.5 trillion in bonds in a program that started in January 2013 to ensure steady employment gains.
“Given the current conditions, I won’t be surprised if it is $1.5 trillion,” Evans, a consistent supporter of record stimulus, said in a speech today in Chicago. “It could be a little more than that.”
The Federal Open Market Committee pledged last month to press on with $85 billion in monthly bond buying until seeing substantial improvement in the outlook for the labor market. While U.S. employers in October added 204,000 workers, the Fed probably won’t taper its purchases until a March 18-19 policy meeting, according to the median of 32 economist estimates in a Bloomberg News survey Nov. 8.
“Now it looks like we are going on longer at the full $85 billion pace,” Evans said to reporters. “I had said it was likely to be about $1.25 trillion several months ago.”
The Fed should be careful not to prematurely reduce bond purchases because it’s not certain labor market improvements are sustainable, Evans said.
“I am not in a hurry myself to reduce the flow of purchases,” he said. “I’d rather wait just a little bit longer and have more confidence.”
The benefits of Fed stimulus far outweigh the risks, with unemployment above the long-term trend and inflation below the Fed’s 2 percent target, Evans said in a speech to the Illinois Bankers Association.
“We have ample safeguards in place” to ensure financial stability, Evans said.
While a surge of inflation may be the biggest risk from the Fed’s $3.91 trillion balance sheet, “inflation is low and it is expected to continue to be low,” he said. “I don’t see that risk at the moment.”
Evans said he would favor reducing the Fed’s unemployment-rate threshold, by promising to keep rates exceptionally low as long as unemployment exceeds 5.5 percent. The Fed’s current threshold is 6.5 percent.
Janet Yellen, the nominee to be the next Fed chairman, defended bond purchases in a letter to a U.S. senator dated yesterday, saying the easing boosted economic growth and provides benefits that exceed its risks.
“By putting downward pressure on longer-term interest rates and helping to make financial conditions more accommodative, the Federal Reserve’s asset purchases have supported a stronger economic recovery, improved labor market conditions, and helped keep inflation closer to its 2 percent objective,” she said in a response to Senator David Vitter, a Republican from Louisiana.
Yellen, nominated to succeed Ben S. Bernanke as Fed chairman, told a Senate committee last week that job-market gains would arise from stronger economic growth, which was running at a 2.8 percent year-over-year rate last quarter. Fed officials forecast a 2 percent to 2.3 percent expansion for 2013, compared with a 1.7 percent estimate released today by the Organization for Economic Cooperation and Development.
Speaking today in Washington, Bernanke said the labor market has shown “meaningful improvement” since the start of the central bank’s bond-buying program and that the benchmark interest rate will probably stay low long after the purchases end.
Evans, 55, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. The district bank chief was also an early backer of the current round of bond purchases, and he dissented twice in 2011 in favor of easier policy.
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