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Fed’s Evans Says More Accommodation Needed to Boost Recovery

March 22 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the central bank needs to further ease monetary policy to fuel the U.S. economic expansion.

“Clearly, more accommodation would be appropriate,” Evans said in a speech today in Washington. “At 8.3 percent, the unemployment rate is substantially above reasonable measures of the natural rate.”

After cutting the benchmark interest rate to zero in December 2008, the policy-setting Federal Open Market Committee increased stimulus by purchasing government bonds and mortgage-backed securities. Evans said the Fed shouldn’t begin to tighten policy until the unemployment rate falls below 7 percent or inflation breaches 3 percent. The FOMC plans to keep the main rate low at least through late 2014.

“It is not a first-best policy tool to use calendar dates alone for forward guidance,” Evans said in remarks accompany a paper he presented to a Brookings Institution conference.

The FOMC has changed the language on its interest rates pledge several times since 2008. At first the committee said economic conditions would probably warrant low rates for “some time,” and changed that language in 2009 to “an extended period.” In August 2011, it specified a date of mid-2013, and in January extended that to at least through late 2014.

‘Surge’ in Demand

“Conditioning, if credible, could be helpful in limiting the inflationary consequences of a surge in aggregate demand arising from an early end to the post-crisis deleveraging.” Evans and economists Jeffrey Campbell, Jonas Fisher and Alejandro Justiniano wrote in the paper Evans presented. “Forward guidance in monetary policy statements has had a significant effect on yields of Treasury notes and corporate bonds since the onset of the financial crisis.”

The district bank chief, who isn’t a voting member of the FOMC this year, has been among the most vocal proponents for additional Fed easing.

Policy makers must not “buy too quickly” into the notion that inflation expectations may soon surge or “we’ll end up following overly restrictive policies that could unnecessarily risk condemning the U.S. economy to a lost decade,” Evans said in Frankfurt last week.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net

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

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