Tags: Fed | Evans | QE3 | Economy

Fed’s Evans: QE3 Will Make Economy More Resilient to Risks

Tuesday, 18 Sep 2012 08:21 AM

Federal Reserve Bank of Chicago President Charles Evans said the central bank’s third round of quantitative easing will help the economy keep growing despite headwinds from Europe’s debt crisis as well as potential U.S. tax increases and spending cuts.

“Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy,” Evans said according to prepared text of a speech in Ann Arbor, Michigan. The Fed’s actions last week “provided a more accommodative monetary policy that can help us achieve such resilience.”

Evans has been among the most outspoken advocates for additional monetary stimulus from the Fed in the past year. In an Aug. 27 speech he called for the Federal Open Market Committee to engage in open-ended asset purchases, a strategy that was adopted by the Fed in its Sept. 13 decision to purchase $40 billion a month in mortgage debt until the labor market improves.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Chicago Fed chief renewed his call for the policy makers to provide accommodation as long as unemployment remains above 7 percent and the inflation outlook is under 3 percent. Evans said that although the Fed did not adopt this policy last week he supports the QE3 decision “wholeheartedly.”

Disappointing Growth

Evans said the Fed’s actions will help strengthen a pace of growth that has been “disappointing” and help counteract “greater downside risks posed by the slowdown in global economic growth, the economic turmoil in Europe and the fast- approaching U.S. fiscal cliff.” If Congress doesn’t act, more than $600 billion in automatic tax increases and spending cuts will take effect starting in January.

The FOMC took action last week following a Sept. 7 Labor Department report showing the economy added 96,000 jobs in August. The unemployment rate dropped to 8.1 percent from 8.3 percent as 368,000 people left the labor force.

In addition to undertaking QE3, the Fed said last week that economic conditions would likely warrant holding their target interest rate near zero through at least mid-2015, extending a previous date of late 2014. The Fed said low interest rates will remain appropriate for a “considerable time” after growth strengthens.

The Fed is contending with a slowing economy. Gross domestic product climbed by 1.7 percent in the second quarter, down from 2 percent in the first quarter and 4.1 percent in the fourth quarter of last year.

Highly Accommodative

“Stating that we expect to keep a highly accommodative stance for policy for a considerable time after the recovery strengthens is an important reassurance to households and businesses that Fed policy will not tighten prematurely,” Evans said.

Stocks and commodities have rallied since the Fed said on Aug. 1 that it would “provide additional accommodation as needed to promote a stronger economic recovery,” foreshadowing the launch of QE3 last week.

The Standard & Poor’s 500 Index rose 6.3 percent from Aug. 1 to Monday. The S&P GSCI index of 24 commodities has risen 6.4 percent in that time period.

Evans said the Fed should be willing to risk a little more inflation in order to help improve the labor market. The Fed should “not be resistant” to policies that lower unemployment closer to its longer-run level “but run the risk of inflation running only a few tenths above our 2 percent goal.”

Evans, 54, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. Fed presidents rotate voting on monetary policy with Evans voting next year.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Federal Reserve Bank of Chicago President Charles Evans said the central bank’s third round of quantitative easing will help the economy keep growing despite headwinds from Europe’s debt crisis as well as potential U.S. tax increases and spending cuts.
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2012-21-18
Tuesday, 18 Sep 2012 08:21 AM
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