Fed’s Evans Wants to See Inflation Quicken Before QE Taper

Federal Reserve Bank of Chicago President Charles Evans, who has consistently supported record stimulus, said the Fed shouldn’t taper its $85 billion in monthly bond buying until inflation and economic growth pick up.

“To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,” Evans said today in a speech in Greenville, South Carolina.

Evans, a voter on policy this year, said to reporters he has an “open mind” on whether the Federal Open Market Committee should reduce bond purchases at its Sept. 17-18 meeting. The FOMC has pledged to press on with buying until the job market shows signs of substantial gains.

U.S. employers added 169,000 jobs last month, less than economists forecast, and the jobless rate fell to 7.3 percent from 7.4 percent, a government report showed today in Washington. The data, which showed the lowest participation rate since 1978, was “not as good as I expected,” Evans said.

Revisions to employment reports in the previous two months subtracted a total of 74,000 jobs. The unemployment rate may “flatten out” as discouraged workers return to the job market amid signs of economic improvement, Evans said in response to audience questions.

Jobless Rate

Still, U.S. employment has “definitely improved” from the start of the current round of bond buying, when data showed the unemployment rate was 8.1 percent and monthly payroll growth was averaging about 135,000, he said.

“It is not going to make an enormous difference in our asset purchase program if we were to do it at this meeting or the next meeting,” Evans said to reporters after his speech, referring to any reduction in bond buying. “In the big scheme of things, I subscribe to the view it is the full size of the program that is most important for achieving the beneficial economic effects.”

The economic outlook will probably allow the Fed to reduce asset purchases “later this year and subsequently wind down these purchases over a couple of stages,” with a halt to the program around mid-2014, Evans said in his speech.

The rise in market interest rates in recent months as Fed officials publicly talked of slowing bond buying has prompted “greater discipline” in markets, with less “exuberance” or excessive risk taking, Evans said.

Yields Plunge

The benchmark U.S. Treasury 10-year yield plunged after release of today’s employment report, declining 0.1 percentage point to 2.89 percent at 10:14 a.m. New York time, Bloomberg Bond Trader data showed. Before the report, the yield breached 3 percent for the first time in two years.

“The U.S. economy has a long way to go to return to healthy normalcy,” Evans said before the jobs report was released.

The Fed should press on with bond buying until unemployment declines to about 7 percent, with forecasts of a continuing decline; other labor market indicators show similar improvement; and data elicit “considerable confidence” that inflation is moving back toward 2 percent, Evans said.

The FOMC said in a July 31 statement that inflation persistently below its 2 percent goal poses a risk to the economy. The Fed’s preferred measure of inflation, the personal consumption expenditures index, showed prices rising 1.4 percent in the 12 months ended in July.

Data Thresholds

Policy will remain accommodative even after the Fed ends quantitative easing, and short-term interest rates could remain near zero after the unemployment rate falls to the FOMC’s policy threshold, Evans said. The committee, drawing on an Evans proposal, has pledged to keep the federal funds rate near zero at least as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent.

“I can easily envision certain circumstances in which the unemployment rate could go below 6 percent before we moved the funds rate up,” he said.

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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