Fed's Charles Evans Calls for More Fiscal Aid, Signals Further Monetary Easing

The head of the Chicago Federal Reserve on Thursday called on Congress to deliver more fiscal aid and signaled U.S. monetary policy would be eased further and interest rates kept at ultra-low levels for years to help the economy recover its pre-pandemic strength.

Even with further government stimulus, and assuming progress in controlling the coronavirus, Chicago Fed President Charles Evans predicted U.S. output won't return to pre-crisis levels until late 2022. At that point, he forecast, unemployment will still be between 5% and 5.5%. He added that inflation will likely remain below the Fed's 2% goal for some time.

"Given my outlook, I expect this means highly accommodative monetary policy will be appropriate for some time to come," Evans said in remarks to the Lakeshore Chamber of Commerce in Hammond, Indiana.

But monetary policy, he said, takes "second-chair" to fiscal policy in the current downturn, which he pointed out resulted from planned shutdowns of economic activity in order to contain the spread of the virus. While some parts of the economy have been able to return to near normal, others have not, and even businesses that have enjoyed strong sales may be hurt now that much of the first round of fiscal relief has expired, he said.

If partisan politics blocks lawmakers from agreeing on a new fiscal package, he said, that "presents a very significant downside risk to the economy today."

A new Fed policy framework adopted last week promises to tackle "shortfalls" in employment and aim for above-2% inflation to make up for periods below that level, effectively ruling out any rate hikes under Evans' forecast until well beyond 2022.

"It is important that our future monetary policy actions are true to the principles laid out in the new consensus statement," he said.

Indeed, Evans signaled he would like to ease policy further to bolster the pandemic-hit economy, which is showing some signs of improvement though overall remains weak.

One way to do so, even with rates already pinned near zero, would be to promise to keep them there, using massive bond purchases if needed, until inflation or unemployment reach specific targets.

"I think that articulating outcome-based forward guidance for the rate path and asset purchases could be beneficial in the not-too-distant future," he said.

The Fed is scheduled to hold its next policy meeting in mid-September.

Meanwhile,  Atlanta Fed President Raphael Bostic said the central bank's understanding of the relationship between employment and inflation has shifted and determining when to raise interest rates will depend more on the trajectory of inflation than the exact level.

Bostic said he would not be concerned with inflation going above the Fed's goal of 2%, reaching up to about 2.4%, if prices remain stable. "As long as we see the trajectory moving in ways that suggest that we are not spiraling too far away from our target, I'm comfortable just letting the economy run and letting it play out," Bostic said in an interview with the Wall Street Journal.

The U.S. central bank announced last week that it was revising its approach for setting monetary policy to focus more on addressing shortfalls in employment and less on inflation. Bostic said policymakers noted that the relationship between inflation and employment was weaker from 2012 to 2018 than it had been in previous decades.

Now, Fed officials are more comfortable with leaving rates low until there are signs of higher inflation or of financial instability, he said. "I think we're going to be willing to be more stimulative than perhaps we have been historically," Bostic said.

Asked about whether the Fed's low rate policy was inadvertently boosting asset prices, Bostic said he thinks policymakers should be concerned about asset bubbles

However, he noted that the U.S. economic recovery has been uneven and that restaurants, hotels and entertainment businesses are struggling. Tightening monetary policy too soon could hurt workers in those industries, he said.

"I think it would be a mistake for us to take off some of the relief and support because those places will have a much harder time getting back on their feet," he said.