CHICAGO — Chicago Federal Reserve Bank president Charles Evans said Friday that an accommodative monetary policy remains “appropriate,” but suggested he does not see a need for further large-scale asset purchases beyond the $600 billion of long-term Treasury security buying scheduled through June.
Evans said that at the conclusion of those purchases a first step toward firming monetary policy could be for the Federal Open Market Committee to instruct the New York Federal Reserve Bank’s open market desk to stop reinvesting the proceeds of maturing mortgage-backed securities, but added that such a step should not be taken immediately.
Evans, a voting member of the policy-making FOMC this year, said letting maturing MBS run off — thereby shrinking the Fed’s balance sheet, as the central bank was doing up until last August — should only come after some period of time and after the committee has had time to reassess the economy’s trajectory.
Evans spoke to a handful of wire service reporters over breakfast at the Chicago Fed’s headquarters.
Although the economy has improved and disinflation risks have receded, he said “an extended period” of very low interest rates is still needed. He downplayed the threat of inflation rising above the Fed’s implicit target range of 1.6% to 2.0%, saying the spike in oil and other commodity prices will likely have only a transitory effect.
Should inflation rise faster than expected, Evans said he would be prepared to support an earlier tightening of monetary policy, but strongly suggested that is unlikely.
He projected real gross domestic product growth of at least 4% this year, but said even at that rate it will take four years to return to full employment, and that slack in the labor market will hold down wage-price pressures. He predicted core inflation in personal consumption expenditures will not even rise to 1.5% until 2013.
Evans was a vocal supporter of the second round of so-called quantitative easing, or QE2, when it was launched last November. He said the $600 billion asset-purchase program remains appropriate and sound policy even though “the economy definitely continues to improve.”
“With each month, each quarter, there seems to be more momentum,” Evans said. He added that business contacts in his industrialized district are telling him that things are “continuing to improve in the way they expected .... They are on their business-plan expansion path, and that’s a very good sign.”
What’s more, “disinflationary risks have certainly diminished,” Evans said. “I personally don’t see as many needs for a further amount” of quantitative easing.
But he said the amount of monetary stimulus that the FOMC has put in place needs to “stay in place” until the Fed determines that the economy’s trajectory has changed in a way that requires less accommodation.
While indicating that additional QE beyond June is probably not needed, Evans also made clear he is in no hurry to provide less accommodation.
He recalled that late last summer he began openly calling for more accommodation because of more sluggish growth, disinflationary trends and a “liquidity trap.” That occurs when the Fed can no longer stimulate the economy through short-term interest rate cuts because it is at the zero bound for the federal funds rate, and consumers and businesses are reluctant to spend money or delay spending in the expectation of lower prices.
“We’ve obviously improved beyond some of those risks, and I think they are smaller,” Evans said.
But he added: “That said, short-term interest rates continue to be extremely low. There continues to be a savings behavior which exceeds the investment demand, although that is improving.
