NEW YORK – Accommodative monetary policy is still warranted as high unemployment and low inflation prevail, Federal Reserve Bank of Chicago President and Chief Executive Officer Charles L. Evans said Monday.
While recent economic data have been “encouraging,” Evans told a University of South Carolina audience, according to prepares text of his remarks, which were released by the Fed, “when we look at the past two years as a whole, the improvements have been disappointing. Too many people remain unemployed — some for extended periods — and too many businesses have not yet returned to full operations. Over the course of the recession, the economy lost more output, shed more jobs and experienced more wealth destruction than at any other time since the Great Depression.”
The latest data indicate “growth has picked up and suggest a more sustainable, though still moderate, economic expansion,” offering many reasons for optimism, including labor market pick up, less household debt, better business balance sheets, and available cash to finance spending.
Construction, he noted, remains a source of weakness, and the situation in Japan all add uncertainty.
“Despite clear signs of progress, I am not yet satisfied with the pace of improvement,” Evans said. “After all, my projection of about 4% growth is only moderately higher than the growth rate of potential output. It thus implies only a moderate improvement relative to the levels of activity that we would expect to see if the recession had not occurred.”
Additionally, Evans said, the lower jobless rate results from fewer people losing jobs, not people getting jobs. He said, unemployment will stay “uncomfortably high” for a while, “so accommodative monetary policy continues to be warranted to address this part of our dual mandate.”
While the Federal Open Market Committee considers inflation too low, despite the recent run up in food and energy prices. “I do recognize that in the past three months, energy prices rose at an annual rate of 29%,” Evans said. “And food prices are up nearly 14%. Such increases clearly put a dent in consumers’ purchasing power, and some households have had to make some difficult adjustments.”
Supply and demand forces, he said, are responsible for the spikes, and “in such cases, there is not a direct role for monetary policy. Monetary policy cannot affect the scarcity of resources,” Evans said. Therefore, these increases are not considered inflation. If these “changes in relative price” spurred price hikes on a broader range of goods and services, “monetary policy would have a critical role to play.”
Another point Evans made is that another part of inflation is that firms must be able to pass prices on to consumers. “In today’s economy with many sectors still experiencing lax demand, many firms may not be able to pass on these cost increases. Instead, rising input costs will put a squeeze on their profit margins,” he said.
