Hard to understand why Fed won't do more, Evans says

Wed Jun 27, 2012 3:02pm EDT
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By Ann Saphir

CHICAGO (Reuters) - Chicago Federal Reserve Bank President Charles Evans, one of the U.S. central bank's strongest advocates for further monetary policy easing, said Wednesday he is flummoxed by the Fed's timidity in the face of high unemployment and low inflation.

At its policy-setting meeting last week, Fed officials sharply slashed their gross domestic product forecasts for 2012 and 2013 and marked down the outlook for inflation.

Those changes to the U.S. central bank's summary of economic projections, or SEP, suggest progress on its twin goals of full employment and stable prices is slowing if not stalled.

Instead of reacting with a new round of bond buying to boost jobs, the Fed took the much more modest step of adding six months to an existing program, known as Operation Twist, that is aimed at lowering long-term interest rates.

"I think if you look at our projections and the SEPs, it's hard to understand why we wouldn't be willing to do more because the inflation outlook is lower than our objective," Evans told a small group of reporters at the Chicago Fed headquarters.

With unemployment at the "completely unacceptable" level of 8.2 percent and inflation set to fall, the Fed should be ramping up even more its already significant level of accommodation, Evans said. Extending Operation Twist is better than nothing, he said, but is likely to reduce 10-year yields by only about a tenth of a percent.

Although the Fed said in January it will take a "balanced approach" to meeting its goals, Evans suggested Wednesday the central bank should allow a bit more inflation in the pursuit of higher employment.

"I don't think we've clarified what we mean by ‘balanced approached' at all," said Evans, who grimaced at times as he described an economy close to stall speed and faced with risks from Europe's crisis and elsewhere.   Continued...

Charles Evans, President and CEO, Federal Reserve Bank of Chicago, takes part in a panel discussion titled "Twist and Shout: The Limits of U.S. Monetary Policy" at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012. REUTERS/Danny Moloshok