By Steven K. Beckner
WASHINGTON (MNI) – Chicago Federal Reserve Bank President Charles
Evans Thursday said high levels of unemployment and projected low
inflation make more accommodation “appropriate,” but stopped short of
calling outright for a third round of quantitative easing.
Evans, who dissented in favor of additional monetary easing at the
November and December FOMC meetings and serves on an FOMC subcommittee
on communication, was presenting a paper at the Brookings Institution
co-written with Chicago Fed economists Jeffrey Campbell, Jonas Fisher
and Alejandro Justiniano.
Evans said that by the end of 2014 — the earliest likely time
frame the Fed’s policymaking Federal Open Market Committee has said it
expects to begin raising the federal funds rate — unemployment levels
may call for an extension of zero rates.
But he suggested it may be uncomfortable for the FOMC to announce a
further calendar date delay in rate hikes.
Instead, Evans reiterated his call for economic triggers to replace
the current calendarized version of “forward guidance.” If the FOMC
instead were to announce that it will keep the funds rate near zero so
long as unemployment stays above 7% and so long as inflation doesn’t go
above 3%, then Evans said the FOMC might be forced to keep the funds
rate near zero beyond “late 2014.”
Evans said the unemployment rate of 8.3% is “substantially above
reasonable measures of the natural rate.” He estimated that the “output
gap” is “probably 5 to 6%.” And he said “underlying inflation measures
are projected to be below our 2% objective for a number of years.”
Given those conditions and projections, “clearly, more
accommodation would be appropriate,” he said.
Evans cited Fed research done by, among others San Francisco Fed
President John Williams, showing that, were it not for the zero lower
bound on the funds rate, economic conditions “would call for
substantially more accommodation than anything we have tried to date.”
At its March 13 meeting, the FOMC reiterated its expectations that
“economic conditions are likely to warrant exceptionally low levels for
the federal funds rate at least through late 2014.”
Some Fed officials, not to mention the federal funds futures
market, think the funds rate will need to be raised much sooner, but
Evans suggested that even late 2014 may not suffice.
“By the end of 2014, core inflation is closer to our explicit
objective,” he said. “However, the endpoint for unemployment seems high
relative to any rate that would be consistent with the FOMC’s mandated
goal of maximum sustainable employment.”
“Compared with this baseline scenario, extending the time the FOMC
keeps the federal funds rate at zero would bring policy closer to the
optimum, ” Evans said. “However, it is well known that central bankers
are genetically disinclined to push the limit of monetary accommodation
very far in this direction.”
If, instead of a calendar date, the FOMC adopted his “7/3
threshold,” and if unemployment remained above 7% while inflation
remained below 3%, then “the funds rate could remain low for a longer
period.”
But Evans allowed for deviations from his threshold rule.
For example, “under faster deleveraging, unemployment falls faster
and inflation rises by more,” he said. “In that scenario, the economy
crosses the 7% unemployment threshold in 2012:Q3, and reaches the 3%
inflation threshold in late 2013.”
“Therefore, adherence to the 7/3 threshold policy dictates liftoff
from the ZLB in late 2012,” he said, again referring to that particular
scenario.
“Given the improvement in the economy and labor markets, an earlier
exit seems palatable,” he said. “Even without the 7/3 exit, the endpoint
with 3% quarterly inflation and below 6% unemployment is a potentially
better dual mandate outcome than today’s situation.”
Evans also voiced concern that the FOMC might be tempted to tighten
monetary policy too early — to raise the funds rate before late 2014.
“As the economy accelerates and inflation rises, circumstances will
tempt any conservative central banker to renege on these promises,” he
said.
** MNI Washington Bureau: 202-371-2121 **
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