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Evans Says Fed Must Sustain Stimulus Amid Fragile Rebound

Feb. 28 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the Fed must avoid stifling the U.S. economic expansion by halting record stimulus too soon.

“We need to be careful not to undermine our own policies and remove accommodation prematurely, as the Japanese did,” Evans said today in the text of remarks prepared for a speech in Des Moines, Iowa. “Mindful of this danger, we must guard against complacency and not deviate in our approach.”

Chairman Ben S. Bernanke this week signaled the Fed is prepared to keep buying $85 billion in bonds per month while dismissing concerns record accommodation risks speeding up inflation or creating asset price bubbles. Several participants at a Jan. 29-30 gathering of the Federal Open Market Committee said the Fed should be ready to vary the pace of purchases as the economic outlook changes, according to meeting minutes.

“There remain plenty of headwinds and downside risks that can impede our progress,” said Evans, 55, who votes on monetary policy this year.

The economy will probably grow between 2.5 and 3 percent this year and between 3.5 percent and 4 percent in 2014, bringing down the unemployment rate “close or maybe even a little below” 7 percent by the end of next year, he said. Risks to growth include government budget cuts and an unresolved debt crisis in Europe, he said.

“I am optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014,” he said.

The Fed reiterated in January it will keep its benchmark interest rate near zero as long as the unemployment rate is above 6.5 percent and inflation is projected to be no more than 2.5 percent. Evans said today he expects the jobless rate to fall to that level in mid-2015.

Stimulus Costs

A number of Fed officials at last month’s meeting said the costs of stimulus may warrant reducing or ending the bond-buying program before the labor market substantially improves, according to FOMC minutes. “Several others” noted the risks of pulling back the stimulus too soon, the record said.

Bernanke in congressional testimony yesterday defended the stimulus, citing rising demand for autos and a strengthening housing market.

“We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation,” he said.

Evans said he sees few signs of any “froth” in financial markets that may destabilize the economy, adding that the Fed is watching for any threats to stability.

The Standard & Poor’s 500 Index declined 0.1 percent to 1,514.68 in New York, while the yield on the U.S. 10-year Treasury note fell three basis points, or 0.03 percentage points, to 1.88 percent. The stock index is up 6.2 percent this year.

Evans has been among the most vocal proponents of stimulus within the Fed, having dissented twice in favor of more accommodation in 2011. He was the first FOMC participant to propose that the Fed link its zero-rate policy to economic indicators, a suggestion that was adopted by the FOMC in December.

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

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

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