Fed’s Evans Says Rates Wrong Tool for Financial Stability

Federal Reserve Bank of Chicago President Charles Evans, an advocate of record stimulus, said the Fed shouldn’t abandon its unconventional policy and raise the main interest rate to contain risks in the financial system.

“If more restrictive monetary policies were pursued to generate higher interest rates, they would likely result in higher unemployment and a sharp decline in asset prices, choking the moderate recovery,” Evans said in a speech in Chicago today. “Stepping away from otherwise appropriate monetary policy to address potential financial stability risks would degrade progress towards maximum employment and price stability.”

The U.S. central bank has deployed record monetary accommodation to reduce joblessness, and officials are debating when to begin reducing the pace of their $85 billion in monthly bond purchases with a balance sheet now at $3.81 trillion. Kansas City Fed President Esther George is among those calling for a reduction in the bond buying soon out of concern the stimulus risks creating imbalances in the financial system.

The Fed’s new “regulatory efforts can effectively minimize the risks of another crisis and increase the resiliency of the financial system,” said Evans, who is a voting member on the Federal Open Market Committee this year. “We can achieve these objectives without having to resort to wholesale changes to the financial system and without degrading our monetary policy goals.”

Job Market

Speaking to reporters after the speech, Evans said the most recent employment reports have made him nervous and that the economic data have continued to surprise him. The Fed is looking for increasing momentum in the economy, he said.

“I don’t think that we have enough positive additional information going into the next meeting to all of a sudden decide what is appropriate,” the Chicago Fed chief said.

The FOMC’s next scheduled meeting is Oct. 29-30.

In his speech, Evans added that because inflation is still low and unemployment is “unacceptably high,” the Fed should maintain low interest rates until the economy is on a “sustainable path to its potential level.” The central bank’s unconventional policies have helped reduce borrowing costs for consumers and businesses, he said.

Before it's here, it's on the Bloomberg Terminal.