Federal Reserve Bank of Chicago President Charles Evans, a voter on policy this year, said the Fed shouldn’t taper its $85 billion in monthly bond buying until inflation and economic growth pick up.
“To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,” Evans said in a speech in Greenville, South Carolina. He has consistently supported record stimulus.
The Federal Open Market Committee at a Sept. 17-18 meeting will probably consider whether to begin scaling back a bond purchase program that it has pledged to continue until the job market shows signs of substantial improvement.
The FOMC said in a July 31 statement that inflation persistently below its 2 percent goal poses a risk to the economy. The Fed’s preferred measure of inflation, the personal consumption expenditures index, showed prices rising 1.4 percent in the 12 months ended in July.
The economic outlook will probably allow the Fed to reduce asset purchases “later this year and subsequently wind down these purchases over a couple of stages,” with a halt to the program around mid-2014, Evans said.
The job market has “definitely improved” from the start of the current round of bond buying, when data showed the unemployment rate was 8.1 percent and monthly payroll growth was averaging about 135,000, he said.
U.S. employers probably added 180,000 jobs last month, and the jobless rate held at the more than four-year low of 7.4 percent, according to a Bloomberg survey of economists before the release of a government report at 8:30 a.m. in Washington.
“Still, the U.S. economy has a long way to go to return to healthy normalcy,” Evans said. “An unusually high number of productive, potential workers are not even looking for jobs right now.”
The Fed should press on with bond buying until unemployment declines to about 7 percent, with forecasts of a continuing decline; other labor market indicators show similar improvement; and data elicit “considerable confidence” that inflation is moving back toward 2 percent, Evans said.
Policy will remain accommodative even after the Fed ends quantitative easing, and short-term interest rates could remain near zero after the unemployment rate falls to the FOMC’s policy threshold, Evans said. The committee, drawing on an Evans proposal, has pledged to keep the federal funds rate near zero at least as long as unemployment exceeds 6.5 percent and the outlook for inflation is no more than 2.5 percent.
“I can easily envision certain circumstances in which the unemployment rate could go below 6 percent before we moved the funds rate up,” he said.
The FOMC will probably vote at its meeting this month to taper its unprecedented stimulus program, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13. The first step may be to taper monthly purchases by $10 billion to a $75 billion pace, according to the median estimate in the survey of 48 economists. They said buying will probably end by mid-2014.
Reports since the July 30-31 meeting, in which the FOMC said downside risks to the economy had diminished, suggest the U.S. economy has continued to make gains. Manufacturing expanded in August at the fastest pace in more than two years, the Institute for Supply Management’s factory index showed this week.
Evans, 55, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. The district bank chief was also an early backer of the current round of bond purchases, and he dissented twice in 2011 in favor of easier policy.
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