June 27, 2012 / 6:08 PM / 6 years ago

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

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.

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

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.

“I think that a balanced approach means I’d be willing to undertake accommodative policies at some risk of increased inflation - it’s below our target - at some risk of increasing it above that by some amount,” he said. “How much? How much? That’s a fair question. We are not offering very much in delineating that.”

The Fed last week kept its guidance that rates will stay low until at least late 2014, tying policy to the calendar in a fashion that virtually no Fed policymaker appears to support wholeheartedly.

Evans, for his part, said the Fed needs to provide more clarity around that guidance, and reiterated his view the central bank should promise to keep rates low until unemployment falls to 7 percent, or inflation threatens to rise above 3 percent.

It should also be clearer about how far inflation would need to deviate from the Fed’s 2 percent inflation target, either above or below, before setting off alarm bells, he said.

Yet Evans suggested the Fed’s communications sub-committee, of which he is a member, is not close to adopting new color to its current guidance.

“We are trying to understand the implications of what we’ve put in place, and whether or not there are simple enhancements, or alternative enhancements, that could improve things,” he said.

Before committing to further quantitative easing, the Fed last week appeared to want to give European policymakers a chance to stabilize the crisis-stricken euro zone, warning of “significant downside risks to the economic outlook,” including Europe’s sovereign debt crisis.

Fed Chairman Ben Bernanke also said he was watching to see if jobs data might improve before unleashing any new round of bond purchases.

Evans said the Fed already has plenty of data. He expects the economy to grow between 2 percent and 2.5 percent this year and next, and inflation to come in below the Fed’s 2 percent target over that same time period.

“I’d prefer to clarify our forward guidance, and then indicate that we’d like to see progress, and then if the progress isn’t being met, have a plan of purchases - it could be Treasuries, it could be MBS (mortgage-backed securities),” Evans said.

“I think we should be doing more accommodation.”

Reporting by Ann Saphir; Editing by Chizu Nomiyama and Neil Stempleman

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