Thursday, November 29, 2012

Federal Reserve should keep rates low until unemployment hits 6.5%, says Charles Evans

TORONTO/BERLIN: Deep divisions at the Federal Reserve were on display on Tuesday, just two weeks before the US central bank's next policy-setting meeting, with one top Fed official pushing for more easing, and another advocating limits.


The divide underscores the hurdles Fed Chairman Ben Bernanke faces as he tries to win consensus among his fellow policymakers on the central bank's sometimes controversial efforts to bring down the nation's lofty unemployment rate, which registered 7.9 per cent last month.

Charles Evans, president of the Chicago Federal Reserve Bank and one of the Fed's most outspoken doves, said interest rates should stay near zero until the jobless rate falls to at least 6.5 per cent.

Such a policy would carry "only minimal inflation risks," and could boost growth faster than otherwise, he said.

Evans, who rotates into a voting seat on the Fed's policy-setting panel in January, also said the Fed should step up its program of quantitative easing in the new year to keep its overall level of asset purchases at $85 billion a month for most, if not all, of 2013.

But Dallas Fed President Richard Fisher, a self-identified inflation hawk, said the US central bank could get into trouble if it does not set a limit on the amount of assets it is willing to buy.

"You cannot expand without limits without horrific consequences," he told reporters on the sidelines of the conference organized by the Levy Economics Institute in Berlin.

"There is no infinity in monetary policy, we know that from the German experience."

In September the Fed launched an open-ended asset-purchase program, kicking it off with a monthly $40 billion in mortgage-backed securities and promising to continue or ramp up the program unless the outlook for the labor market improves substantially.

Those purchases come on top of the $45 billion in long-term Treasuries the Fed is buying each month under Operation Twist, purchases that are funded with sales of a like amount of short-term Treasuries.

"It's important to maintain the overall level of asset purchases at $85 billion, at least for a time until we can see whether or not we are doing better or things are going more slowly, and we can adjust, depending on that assessment," Evans told reporters attending a speech at the C.D.

Howe Institute in Toronto "I think we have to have discussion about what is 'substantial improvement.' Have we seen it? In my opinion, we have not," he said.

Evans said he would judge the labor market as substantially improved once he sees monthly job gains of a least 200,000 for about six months, as well as above-trend growth in gross domestic product that would lead to declines in unemployment.

"I would be very surprised if we could achieve that before six months have passed, and I would not be surprised if it takes until the end of 2013," he said.

Evans said the Fed should keep rates low well beyond that date, until the jobless rate hits at least 6.5 per cent, as long as the inflation outlook for the next two to three years remains below 2.5 per cent. The Fed's inflation target is 2 per cent.

indiatimes.com

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