Low inflation suggest it will be "appropriate" to keep the Fed funds rate low for "quite some time," according to Federal Reserve Bank of Chicago President and Chief Executive Officer Charles L. Evans, who backed a change in forward guidance to show the Federal Open Market Committee is "in no hurry to raise rates."
"We will not prematurely reduce accommodation in an economy with elevated unemployment and very low inflation pressures," Evans said at a luncheon in Iowa, according to prepared text of his remarks, released by the Fed.
He reminded the audience that the 6.5% unemployment level is "a threshold and not a trigger" for raising the funds rate. "Exactly when we would begin to raise the funds rate once we hit 6.5% depends critically on whether we are expecting continued improvements in the labor market and on what the outlook for inflation is relative to our 2% target," Evans said.
Regarding the tapering of asset purchases, Evans said, "When the Committee met this past December, with the unemployment rate at 7% and other labor market indicators showing improvement, we decided that the cumulative improvement to that point met the criteria for first scaling back purchases. This decision does not, however, mean we thought the economy needed less overall policy accommodation. Rather, the Committee agreed it was time to rebalance the mix of monetary policy."
Recent economic data are "encouraging," with labor market improvement, despite a "disappointing" December report. But, Evans noted, "At 6.7%, the unemployment rate is still well above the 5.25% rate I think is consistent with its normal longer-run level."
Also, a great deal of the drop in the unemployment rate resulted from "people dropping out of the labor force as opposed to finding new jobs," he said. "In addition, the level of activity in many sectors of the economy, while improving, still has some way to go before returning to what we would consider normal."
Inflation news "has not been good," he said, as inflation remains too low.
Overall, Evans expects 2.75% growth on 2014 and higher growth in 2015, given the support of highly accommodative monetary policy. "I think this growth should bring the unemployment rate down to 6% or even a bit lower by the end of 2015."
Predicting unemployment levels "is unusually tricky right now because of the large decline in the labor force participation rate," Evans added.
"But the very low inflation in an environment of rebounding growth and highly accommodative monetary policy continues to be both puzzling and worrisome," he said.
Evans said five issues shape his thinking on the economy: fiscal restraint has been a headwind; the Fed funds rate is as low as it can go; inflation is below the 2% objective; there are ample safeguards built into the Fed's unconventional monetary policy tools; and Fed credibility is an integral part of policy.
"In terms of monetary policy strategy, after four years of weak and inadequate growth with low inflation, we need extraordinary monetary accommodation to finish the task at hand," Evans said. "The public must have confidence in the Fed's ultimate resolve to successfully address economic challenges. We need to be both bold and committed to following through. Simply put, we have to use enough club and be willing to hit the ball with a full swing; a half-hearted effort will bring us up short."
