Now is not the time to remove accommodation and policy should remain as is for "some time to come," and it may take a 6% unemployment rate before the federal funds rate target is raised, Federal Reserve Bank of Chicago President and Chief Executive Officer Charles L. Evans said Thursday.
"In answer to the questions of how much longer and whether we are near the endpoint for policy accommodation, I decidedly say no. It is not yet time to remove accommodation," Evans told a conference in Madison, Wis., according to prepared text released by the Fed. "The data are still not definitive enough to say that now is time to adjust the QE3 flow purchase rate. And we are a long way from seeing an unemployment rate below 6-1/2 percent in the context of inflation moving surely toward our target. Accordingly, I expect our overall stance of monetary policy to remain highly accommodative for some time to come. My colleagues on the FOMC and I have laid out certain markers that should help gauge the timing of when we will begin to change the stance of policy. When those markers are reached, we will carefully weigh incoming data to determine if we can improve economic activity and bring inflation in at our 2 percent objective."
But, he noted, monetary policy is data-driven. "The degree of accommodation will depend on the data; neither changes in the pace of asset purchases or, further down the road, changes in the fed funds rate are on a preset course," Evans said. "Only the data can tell us how much progress we've made, and they aren't saying much right now."
"I'm often asked questions like the following: How big is the Fed balance sheet going to get?, and exactly when is the first increase in the fed funds rate going to take place? Some days I wish I could answer these questions with a single number, a firm date and a confident fist pump. But that's not possible," he noted.
Pointing to the September Federal Open Market Committee meeting when the markets expected a paring of the Fed's asset purchases, Evans noted the panel "viewed the data available at that meeting as being too ambiguous - and the near-term risks to growth as being too large - to slow the pace of LSAPs. We concluded that we had not yet clearly passed the economic markers that would justify a reduction in purchases."
Additionally, Evans said "the exact pattern" of tapering doesn't matter much "because the path is likely to have only a marginal impact on what is most important - the total amount of purchases that are eventually made."
QE3 will end with the Fed having bought about $1.25 trillion of securities under the program, about twice the size of QE2, he estimated.
"Furthermore, when we ultimately end the current purchase program, we won't be doing anything to reduce the balance sheet," he said. "Even though it will no longer be expanding, the balance sheet won't actually begin to shrink until sometime much later when we make the decision to stop reinvesting maturing assets. Even then, it will only gradually decline as assets mature. Accordingly, our expanded balance sheet will be providing accommodation for a long time after we have ceased adding assets to our portfolio."
Also, the 6.5% unemployment rate target is not an automatic trigger for a federal funds rate hike, Evans said. "When we cross the 6-1/2 percent unemployment rate threshold, we will closely evaluate the available information." These policies include that the "2 percent inflation goal is a symmetric target, not a ceiling. We're shooting for inflation to average 2 percent over the medium term. This is different from aiming to keep it no higher than 2 percent."
The Fed will also keep its dual mandate in mind when the unemployment target is reached, and Evans said, "I can easily envision certain circumstances in which the unemployment rate could go below 6 percent before we moved the fed funds rate up."
Evans said, "For me to be confident that we in fact have achieved substantial, sustainable improvement in labor conditions, I would need to see the lower unemployment rate accompanied by cyclical improvement in the participation rate. And I also would need to see more steady, solid growth in gross domestic product (GDP) to be confident that the labor market gains would not be undone by a drop in businesses' demand for labor."