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Thread: Fed Needs More Easing Until Economy Grows:Evans

  1. #1
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    Fed Needs More Easing Until Economy Grows:Evans

    Fed Needs More Easing Until Economy Grows: Evans
    Published: Tuesday, 30 Aug 2011 | 8:33 AM ET Text Size
    By: Jeff Cox Senior Writer

    The Federal Reserve may need to be even more aggressive in its easing policies than it has been so far unless the economy shows significant improvement, Chicago Fed President Charles Evans told CNBC.

    Chicago Federal Reserve President Charles Evans

    A jobless rate at 9.1 percent is "consistent with recession" while inflation is far from a worry, Evans said while defending both the central bank's previous actions to stimulate conditions and his view that even more action along the lines of quantitative easing will be needed.

    In his view, QE needs to stay in place until unemployment plunges to 7 percent or if inflation gets past 3 percent. Core inflation, which strips out food and transportation, is about 1.8 percent, though the number is 3.6 percent including the more volatile measures.

    Evans is a voting member on the fed Open Market Committee and traditionally has been among its more dovish members when it comes to interest rates and inflation.

    "Strong accommodation needs to be in place for a substantial period of time," he said. "If we could sort of make everybody understand that this is going to be in place for a longer period of time, we could knock out some of that restraint that comes about when people talk about premature tightening."

    Since the financial crisis hit in 2008, the Fed has expanded its balance sheet past the $2.5 trillion mark and kept its funds rate near zero in an effort to stimulate the economy.

    However, the housing market is worse than Great Depression levels, recent manufacturing readings have been around contraction levels and weekly jobless claims have stayed above 400,000.

    Nevertheless, Evans said things would be worse without Fed intervention even while acknowleding that the economy has not achieved the "escape velocity" it need to establish a recovery.

    "We would have been so much worse if we had not had the accommodation that has been in place, the additional accommodation that came with QE2," he said.

    His comments come just weeks after the Fed took the unprecedented step of saying it would maintain its zero interest rate policy for at least two more years.

    Critics say the low rates have fomented inflation, but Evans said that is not a concern. The question of easing and the low rates have stirred dissent within the Fed as well, with Philadelphia Fed President Charles Plosser recently telling CNBC that more QE is not needed.

    "Given the way the economy is growing and inflationary pressures are not nearly as strong as a lot of people think, I think that there's room for accommodation," Evans said. "As long as medium-term inflation stays below 3 percent we could continue to have a low funds rate."

  2. #2
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    A top Federal Reserve official who dissented from the U.S. central bank's move this month to ease monetary policy further signaled he would drop his opposition.

    But Minneapolis Fed President Narayana Kocherlakota stopped well short of saying he would support any further easing, and his remarks show he remains firmly on the hawkish wing of the Fed's policy-setting panel.

    The Fed , which has already cut short-term interest rates to near zero and bought $2.3 trillion in long-term securities to boost the recovery, said on Aug. 9 it would likely keep benchmark U.S. rates exceptionally low for the next two years. The decision drew three dissents, the most in nearly 20 years.

    "I see no reason to revisit the decisions of August 2011," Kocherlakota said in remarks prepared for delivery to the National Association of State Treasurers in Bismarck, North Dakota.

    "I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future, and this ability has certainly proved very useful in the past three years," Kocherlakota said. "So, I plan to abide by the August 2011 commitment in thinking about my own future decisions."

    Kocherlakota, whose turn to vote on the Fed's policy-setting Federal Open Market Committee runs through the end of this year, stopped short of promising not to dissent on future Fed decisions, however, saying that "the case for any additional easing would have to be made on its own merits.

    Based on Kocherlakota's remarks, such a decision would be a hard sell for him, unless inflation dropped sharply.

    Both inflation and inflation expectations are higher, and unemployment is lower and expected to drop further, than last November when the Fed embarked on its most recent round of monetary stimulus, Kocherlakota said.

    He expects the Fed's preferred gauge of inflation, core PCE (personal consumption expenditure), to rise to 2.1 percent next year versus an expectation of about 1.3 percent last November.

    Meanwhile, the U.S. unemployment rate, which was then at 9.8 percent, has dropped to 9.1 percent, and he expects it to fall to below 8.5 percent by the end of next year.

    While it was still "disturbingly high," he said, the Fed would have been unable to push it lower without boosting inflation above its 2 percent target, which in turn could unmoor inflation expectations and undercut the Fed's ability to keep inflation in check.
    Last edited by Havakasha; 08-30-2011 at 12:42 PM.

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