WASHINGTON — One of the strongest proponents of the Federal Reserve's aggressive monetary easing to spur faster jobs growth said Thursday that monetary policymakers will adjust the pace of the program based on economic conditions - with both employment and inflation concerns playing a role.
In an interview on Bloomberg TV, Chicago Federal Reserve Bank President Charles Evans said the labor market is doing better - thanks in part to Fed support - but said it is "too early" for the central bank to contemplate a policy response to the below-target inflation rate.
Evans also said the Fed could abruptly stop its large scale asset purchases when conditions are met, or decide to gradually reduce the size of the program.
The Fed is currently buying $85 billion a month in Treasury securities and mortgage bonds, and has vowed to continue doing so until it sees a substantial improvement in the outlook for the labor market.
However, at its recent meeting which concluded May 1, the policy-setting Federal Open Market Committee said it is prepared to "increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."
Evans, who holds a voting position on the FOMC this year, said his own interpretation of the statement is that the FOMC is adding another indication that monetary policymakers are monitoring the economy and both sides of the Fed's mandate.
"We could decrease the flow, or we could increase the flow depending on the needs of the economy - whether it's for employment reasons or it's for inflation reasons," he said.
The Fed's asset purchases means it has an ever growing footprint in the bond world, but Evans said he is not concerned about this having an effect on the U.S. Treasuries market. In addition, he said he does not worry about a 1994-style bond market rout.
While the program is open-ended, Evans said the Fed could "basically stop" its buying should conditions warrant.
One approach would be to continue the current pace until it sees the improvement in job conditions its desires "and then bring it to an end." On the other hand, it could "adjust the flow of purchases" if the economy is doing "really well" and labor markets have improved.
"You can do it either way," Evans continued, "that's why I'm open minded - I'm listening to my colleagues and we'll see how it plays out."
For now, "I think we should try as hard as we can, (and) when things turn around we can address that," he said.
The U.S. Labor Department Thursday reported that initial claims for U.S. state unemployment benefits reached their lowest level since the week of Jan. 19, 2008, by falling by 4,000 to 323,000. Last week the Dept. reported that the U.S. economy added 165,000 jobs in April, while the unemployment rate ticked down to 7.5%.
Evans said the claims data shows that the labor market is doing better, and described last month's employment report as "a pretty good one."
"I'd say during the time that we've been doing our asset purchase program the labor market has improved, definitely, and our policies have been helpful," he said.
"I'd like to have confidence that we can sustain that improvement in the labor market through the summer," Evans added.
He did note that there appears to be a disconnect between the employment data and the anecdotal reports he receives from larger businesses.
"I'm not getting a strong sense of rising employment and hiring but the employment numbers have been better," he said, "so maybe the medium- and smaller-sized companies are actually doing better."
Some Fed officials have voiced concern in recent months about an inflation rate that is far below the FOMC's 2% target and said the Fed should be ready to defend its target from the low side.
Evans said he would like to see inflation closer to the 2% target, describing the current rate as "too low relative to our objective."
While his forecast is for inflation to remain below 2% for the next several years, Evans stressed that it is "way too early" to expect current low inflation will elicit a policy response from the Fed as the recent "down-draft" is "transitory."
The FOMC statement blamed fiscal policy for restraining economic growth, and Evans agreed that it has been a drag on economic forecasts.
Evans said he expects growth of 2.5% this year, but that fiscal restraint will knock 1.0 to 1.25 percentage points off GDP. "If we had better help from the fiscal side, we'd be doing a lot better," he said.
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