HAMMOND, Ind. - Chicago Federal Reserve Bank President Charles Evans Wednesday said he expects the Fed to continue asset purchases at current levels once the current maturity extension program, also known as "Operation Twist," ends.
"By the end of this year, we (the Fed) have a decision to make due to Operation Twist ending. We have to decide how much additional asset purchases to do. I expect to do something on the same magnitude we are doing now," Evans told reporters after a speech to the Lakeshore Chamber of Commerce Business Expo luncheon.
To stop the asset purchases, Evans said he would like to see 200,000 -- or probably more like 250,000 -- additions in non-farm payrolls "for a couple of quarters," coupled with above trend growth, increases in labor market participation, and unemployment well below 8%.
"Once asset purchases are done, does not mean go to restrictive policy," Evans said during the audience question and answer session. Furthermore, Evans said he expects the Fed Funds rate to stay at zero "for a considerable period."
"Once we get some velocity increases, will see bank lending uptick and steepening in the Treasury curve, that is when we want to start raising the Fed Funds rate," he said.
"I think we will easily be able to tighten policy appropriately," Evans told the audience.
He told reporters that he does not expect inflation to increase much, if at all, due to current Fed policy.
"Personally, 2% inflation is skimpy, I have said 3%, that might be more generous, but ultimately committee will have to weigh in on that," he said.
Fed "action is more likely to happen on inflation rather than a 5.5% unemployment rate," Evans said.
Evans reiterated to the media his preference for explicit language from the Fed in regards to future policy moves.
"Certainly taking some measure of 7% (unemployment) would be a good measure, I have been arguing for something explicit like that. The more explicit we are, the better," Evans said.
"I have a different view point on Fed policy challenging Fed credibility," he added.
"Bernanke went through a careful speech in Jackson Hole. We know how to unwind our balance sheet to eliminate credibility hits," Evans said.
Evans defended current Fed policy, arguing that "what we have in place is a good way to add to the vibrancy of the economy and to insulate against negative shocks."
If a shock were to cripple the economy, "I would not stop trying, but rather would have to be realistic," he added.
Evans told the gathering, many of whose businesses rely heavily on exporting goods, that even during the current global financial crisis, the U.S. dollar has appreciated because the U.S. economy has remained "a bright spot."
Evans also squashed fears that current monetary accommodation will put deflationary pressure on the dollar.
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