Oct. 17 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the U.S. faces “massive shortfalls in output and employment” and called for new policy steps to ensure the Fed meets its congressional mandate.
The 53-year-old regional bank chief reiterated his proposal, initially unveiled in a speech last month, to keep the target for the benchmark U.S. interest rate near zero until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent. He said he would support more asset purchases if those objectives aren’t reached.
“Some may find such a policy proposal to be hard to understand, or even risky,” he said today of his plan in the text of a speech in Detroit. “But these are not ordinary times.”
The remarks place the Chicago Fed president among the Federal Open Market Committee members who, according to minutes of the FOMC’s gathering in September, wanted to keep further asset purchases as an option to boost a flagging recovery. Evans backed the committee’s Sept. 21 decision to push down longer- term rates and its Aug. 9 commitment to keep the overnight lending rate between banks near zero through at least mid-2013.
Adding triggers to the Fed’s statement “should enable us to make progress toward our mandated goals,” the Chicago Fed president said at a dinner held by the Michigan Council on Economic Education. “If this progress is too slow, then we should move forward with increased purchases of longer-term securities.”
“If we sit on our hands as the economy withers relative to our mandate, then we could take a huge hit to our credibility, akin to what happened to our credibility following the devastating mistakes of the 1930s,” when the Fed kept monetary policy too restrictive during a time of weak loan demand and reluctance among lenders to take risks, he said.
Data released since the Sept. 20-21 meeting shows American employers added 103,000 jobs in September, easing concern the economy is tipping into another recession. Retail sales in September rose by the most in seven months, according to Commerce Department figures.
By contrast, confidence among consumers unexpectedly dropped this month and purchases of new homes declined to a six- month low in August.
The Standard & Poor’s 500 Index slid 1.9 percent to 1,200.86 at the close in New York, while the yield on the 10- year Treasury note declined nine basis points to 2.16 percent. A basis point is 0.01 percentage point.
Evans, unlike most of his Fed colleagues, has repeatedly stated a willingness to tolerate higher inflation as long as it pushes down the jobless level. The Chicago president said the central bank might want to also consider “reevaluating” its progress toward policy goals at each FOMC meeting, along with the rate of asset purchases.
Minutes of the FOMC’s September gathering show that a number of participants saw large-scale asset purchases as “potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”
Most FOMC participants favored providing the public with more information on the central bank’s goals and how those objectives influence the Fed’s decisions, according to minutes of the meeting, released on Oct. 12.
--Editors: James Tyson, Christopher Wellisz
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