CHICAGO - Chicago Federal Reserve Bank President Charles Evans Thursday reiterated his desire for more monetary policy accommodation through "aggressive" asset purchases.

"I would like to provide more accommodation though enhanced forward guidance and monitor the economy," Evans told reporters at a breakfast briefing. "But, in the absence of coming to an agreement on forward guidance, asset purchases may be in order."

And underlining his support for the Fed's most recent policy statement, he said, "I think in addition to portfolio balance sheet effect, (asset purchases) would be a clear indication that policy is going to be accommodative for a long while."

Evans said the Fed can purchase Treasuries and Fannie Mae and Freddie Mac mortgage-backed securities.

"I tend to think more MBS purchases would be more helpful. I would think about the capacity of a substantial purchase, but I would be aggressive."

In implementing more asset purchases, Evans said he would "push them to come up with the most aggressive purchase rate that we could imagine. Some people think that number is well over $1 trillion," over a six-month time horizon. "But if we cannot get it done with MBS then Treasuries could be in the mix too.

"I do not have a particular number in mind but it would be more aggressive than people would imagine," Evans said regarding the size and scope of MBS purchases.

"I have been saying for some time that I am in favor of more accommodation," Evans said. As the economy started to slow and growth became meager in the Summer of 2011, "I became very nervous."

In August, Evans was in favor of the Fed's "extended period" language in describing low rate for a long while. Subsequently, in November and December "I thought we needed more accommodation but committee wanted to wait." In December Evans was the lone dissenter.

At the January FOMC, "while I would have preferred a far more explicit statement, I certainly agree with the Committee in that the Fed funds rate should stay extraordinarily low at least until late 2014." This language was consistent with his economic forecasts, he said.

"I prefer economic markers as to how long Fed policy will be accommodative," Evans said.

Repeating his position, he said, "I think the Fed funds rate should be about 0% until unemployment at least falls below 7%." But even if "inflation picks up to an upper end of the range of 3% over the medium term, that is still consistent with keeping the Fed funds rate at zero.

In the January FOMC statement, "We have been pretty clear," despite what some might describe as a confusing set of statements. Evans said the Fed has diligently tried to improve their communique with the public. "It was aggressive."

But he acknowledged, "I do sort of anticipate that it might take some time," for the markets to understand the Fed's communique. "Perhaps it will take Chairman Bernanke talking to Congress, for things to be more clear."

Evans admitted that the Summary of Economic Projections submitted by 17 FOMC participants and released by the Fed at the latest FOMC had a mixed range of forecasts. Recent dissents among the FOMC committee are consistent with the wide range of views on the SEP.

While "using calendar date has some advantages and conditionality," it is true that given "current economic conditions, it will likely be at least late 2014," before the Fed can tighten policy, Evans said.

"In terms of the real side mandate, there is a lot of language that is pretty clear, in that, we do not have a hard and fast number (on unemployment) because structure of the labor market changed over time," Evans said.

"As we mentioned, currently we think 5.2%-6% is the upper range (on unemployment) an this has been alluded to in my public commentary. This is completely consistent with my view and this is why I was able to whole heartedly support the most recent (Fed) statement," Evans said.

Evans admitted that the current economic situation is "a bit better than in August and September when we were concerned about a slowing, but we have a long ways to go to close output and unemployment gaps -- the latter is very large."

"For reasons like that we need more accommodations. I do not want to be come complacent in thinking our outlook is a little brighter now. We really need growth rate in the 5% range before we can get complacent," Evans said.

"I think we should be aggressive and be sure that we can improve aggregate demand. If we get that we would be so much closer to taking back some of those asset purchases," he said.

Evans added that he is not particularly concerned about disinflationary forces but added that an "Explicit objective on inflation further refines what the markets were expecting of us."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

 

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