Federal Reserve Bank of Chicago President Charles Evans said low inflation and high unemployment both call for continued easy U.S. monetary policy, and there’s little evidence of emerging asset bubbles.
“At present, we’re underrunning both our inflation objective and our employment objective,” Evans said in a speech in New York. “Both call for monetary policy accommodation.”
U.S. central bankers are debating how to address rising inflation and when to start tightening policy after the Fed ends its purchases of $600 billion of Treasuries in June. Richmond Fed President Jeffrey Lacker and Philadelphia’s Charles Plosser have indicated they’re concerned about prices, with Lacker saying the central bank must tighten credit before inflation gains speed.
Evans, echoing the view of Fed Chairman Ben S. Bernanke, said monetary policy shouldn’t be used to address asset prices such as the housing bubble that triggered the longest recession since the 1930s. Evans and other Fed officials will update their economic forecasts and review the Fed’s bond purchase plan at their April 26-27 meeting amid a strengthening labor market and higher inflation.
The Fed’s second round of asset purchases has come under fire from Republican leaders in Congress, who say it risks inflating asset-price bubbles and stoking inflation. Kansas City Fed President Thomas Hoenig dissented last year from record monetary stimulus.
Higher stock prices and narrowing junk bond spreads have been cited as evidence of “overheating asset markets, possibly increasing the risk of a destabilizing asset bubble,” Evans said at the 20th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies organized by the Levy Economics Institute of Bard College. “Are these developments evidence of an incipient bubble? I don’t think so.”
“But even if there were stronger evidence of a bubble, I’m not convinced that leaning against it is good policy. Even if the Fed could accurately detect a bubble in real time, and even if we decided that a bubble-pricking exercise would be warranted, monetary policy is too blunt an instrument for this task.”
Rather, regulatory policy should be used to address financial stability, Evans said. Large U.S. banks should be required to have “substantial” minimum capital, and one option is to require banks to hold debt that would automatically convert to equity at a time of stress, he said.
Creditors must take losses when banks fail, and market discipline should be used rather than government bailouts, Evans said.
“Bondholders of major institutions” need to believe “that future financial workouts will occur without special assistance from the government. To date, though, I haven’t seen very strong evidence that these investors get the message.”
The cost of living in the U.S. rose in March for a ninth consecutive month, led by increases in food and fuel costs, a Labor Department report today showed.
The consumer-price index increased 0.5 percent for a second month, in line with the median forecast of economists surveyed by Bloomberg News. Excluding volatile food and energy, the so-called core gauge rose 0.1 percent, less than forecast and restrained by lower clothing expenses and smaller gains in medical care.
Evans has led the Chicago Fed since September 2007 and is a voting member this year of the FOMC. He 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.