The US Federal Reserve should launch a fresh round of monetary stimulus immediately, buying bonds for as long as it takes to produce a steady decline in the jobless rate, a top Fed official said on Monday. Without a change in policy, the unemployment rate, now at 8.3 percent, was unlikely to fall below 7 percent before 2015 at the earliest, Chicago Federal Reserve Bank President Charles Evans told reporters in Hong Kong.
"I don't think we should be in a mode where we are waiting to see what the next few data releases bring," Evans told a seminar at the Hong Kong Bankers Club. "We are well past the threshold for additional action; we should take that action now." The US central bank on August 1 kept US monetary policy on hold, leaving interest rates at zero and reiterating the view that economic conditions will warrant keeping them there until at least late 2014.
Many policymakers thought more stimulus would be needed "fairly soon," the minutes of the meeting show, but wanted to watch the data for signs of improvement that would render moot the need for additional easing. Evans, who will have a vote next year on the Fed's policy-setting panel, wants no part of that wait-and-see approach. Like the chiefs of the Fed's regional banks in Boston and San Francisco, Evans sees a case for doing now what the Fed has done only two times before - buy long-term bonds in an effort to lower long-term borrowing costs.
Evans said he supports an open-ended bond-buying program, an approach that appears to be gaining converts at the US central bank. The Fed could stop buying bonds after two or three quarters of steady declines in the jobless rate, Evans said, but then should continue to keep rates near zero until the jobless rate falls to 7 percent. Only in the unlikely event that inflation threatens to rise above 3 percent should the Fed change course, he said.
The Fed has bought $2.3 trillion of long-term securities since the Great Recession in an effort to push down borrowing costs and boost the recovery. Any new bond-buying should focus on housing-backed bonds, Evans said. Some policymakers, like Dallas Fed President Richard Fisher, worry that piling on more bond purchases will do little to help the economy and could make the Fed's eventual exit from easy-money policy more difficult. Other Fed hawks fret that letting inflation rise even a little could open the door to massive, uncontrolled price rises.
Evans sees the possibility that if unemployment remains too high for too long it could permanently sap the US economy's underlying strength, which is much more worrisome than the prospect of temporarily higher inflation. "Clear and steady progress toward stronger growth is essential," said the Chicago Fed chief told a seminar run by Deutsche Boerse AG's MNI news agency. "Because we are not seeing that now, I support further use of our balance sheet to provide even more monetary accommodation."
Speaking to reporters afterwards, Evans spelled out his concern that the current policy will not help reduce the jobless rate fast enough. "At the year end, it won't be 7 percent. I'm not expecting the unemployment rate under current policy to go below 7 percent before 2015 at least," he said.
Evans said he expects inflation to stay at or below the Fed's 2 percent target in the medium term, even as unemployment stays well above the historical norm. The Fed should be willing to let inflation rise above the 2 percent target if doing so can help on the employment front, he said, but it should also be clear about how much of a deviation it would tolerate.
The Fed next meets in mid-September, but markets may get a better read on the likelihood of a new round of quantitative easing as soon as this week, when Fed Chairman Ben Bernanke speaks at the Kansas City Fed's annual gathering of policymakers in Jackson Hole, Wyoming. It was at Jackson Hole in 2010 that Bernanke signalled that a second round of bond-buying was imminent. Last year the Fed began a program known as Operation Twist, in which it sells short-term securities and buys long-term ones. The aim of the program, which the Fed in June extended through the end of the year, is to put downward pressure on longer-term rates.