Fed’s Evans: too early to reverse easy Fed policy
Written on September 10, 2009
It is too early to start reversing the United States’ accommodative monetary policy, even as economic recovery is “beginning to start”, but the Federal Reserve will act aggressively if inflation starts to build, Chicago Fed President Charles Evans said on Wednesday.
Evans told the Council on Foreign Relations in New York that he expects the economy to grow in a range of 2.5 to 3 percent over the next 18 months.
“I think the recovery is beginning to start,” Evans said in a question and answer session following his speech.
But he said unemployment will continue to rise for the next six months before peaking above 10 percent, remaining high for a “very uncomfortable” period of time.
Interest rate hikes are “some time down the road”, he said, but added the Fed will ultimately want to be more aggressive than in the tightening cycle between 2004 and 2006.
“As the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively,” Evans said.
The U.S. central bank has set its benchmark lending rate near zero since December, and has created a string of emergency lending programs to revive paralyzed credit markets and get money flowing through the U.S. economy. These include an array of liquidity facilities aswell as programs to buy up to $1.25 of agency mortgage-backed securities, $200 billion of agency debt and $300 billion in Treasuries free credit score.
Financial markets expect the Fed’s first rate hike by mid-2010, though many dealers do not expect a move until 2011.
“The FOMC is monitoring economic and inflation conditions for the signs that adjustments in policy are needed,” Evans said.
Asked whether the Federal Reserve needed to buy all of the $1.25 trillion of agency mortgage-backed securities it said it could buy given the improvements in the economy, Evans said that while it was a “fair question”,
“I expect that we would continue with the entire amount.”
The Fed has bought about 65 percent of that $1.25 trillion so far.
“NOT IN NORMAL TIMES”
In his speech, Evans, a voting member of the central bank’s Federal Open Market Committee in 2009, focused on the “raging” debate between those who still fear price deflation in the U.S. economy, and others who fear inflation is poised to rise uncontrollably.
“Highly regarded analysts talk about the possibility of another debilitating deflation while others — just as highly regarded — suggest that even though we have avoided the Great Depression 2.0, the U.S. economy may be facing the Great Inflation 2.0,” he said.
Filed in: management.