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Fed’s Evans: ‘Open Ended’ Bond Purchases Needed to Boost Economy

Monday, 27 August 2012 07:06 AM

Federal Reserve Bank of Chicago President Charles Evans urged the central bank to begin a third round of bond purchases and to persist with the buying until U.S. unemployment declines for at least six months.

“These could be open-ended purchases, meaning that they would continue at a certain rate until there was clear evidence of improvement in economic conditions,” Evans said Monday in a speech in Hong Kong. “To me, one example of clear evidence would be a resumption of relatively steady monthly declines in unemployment for two or three quarters.”

Many Federal Reserve policy makers said additional stimulus would probably be needed “fairly soon” without evidence of “substantial and sustainable” pickup in the economy, according to minutes of their most recent meeting released last week. Evans, who doesn’t vote this year on the Federal Open Market Committee, has been among the most vocal advocates for stepping up record accommodation.

Chairman Ben S. Bernanke, who last month said a third asset-purchase program was an option, has an opportunity to update his policy outlook on Aug. 31 in a speech to the Kansas City Fed’s annual symposium at Jackson Hole, Wyoming.

“It is time to take even stronger steps, such as the purchase of more mortgage-backed securities, to increase the degree of monetary support for the recovery,” Evans said at an event hosted by Market News International. Once “momentum was confidently established, the Fed could stop adding to our balance sheet but keep the funds rate at zero,” he said.

Round Two

The Fed has expanded its balance sheet with two rounds of bond purchases, known as quantitative easing. In the first, starting in 2008, the Fed bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

The Chicago Fed leader described the U.S. recovery since 2009 as “tepid” and said 2013 growth may be “only moderately higher” than this year, with “significant risks” because of the European debt crisis and turmoil over fiscal policy in the U.S. The political debate over the “fiscal cliff” could cause households and businesses to put spending on hold, he said.

Those concerns “raise the specter of an even more worrisome outcome,” Evans said. “At the moment economic growth is not much above stall speed. Another negative shock could send the economy into recession. And if a recessionary dynamic takes hold, it would be especially difficult to regain momentum.”

Evans also repeated his view that the Fed shouldn’t raise rates until the unemployment rate falls below 7 percent or inflation rises above 3 percent.

Skeptical Presidents

Other Fed presidents voiced skepticism last week about the desirability of additional monetary stimulus. Atlanta Fed President Dennis Lockhart said there are risks to moving “too aggressively” on problems that can only be fixed by fiscal policy, while St. Louis Fed President James Bullard said he opposed new action with the economy showing signs of picking up.

U.S. economic data has been mostly better than expected since the Aug. 1 FOMC meeting with government data showing 163,000 jobs added by employers in July, the most in five months, and retail sales rising after three months of decline.

Evans, 54, was the only member of the FOMC last year to cast a dissenting vote in favor of more accommodation. He became the president of the Chicago Fed in 2007.

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Monday, 27 August 2012 07:06 AM
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