WASHINGTON - Chicago Federal Reserve Bank President Charles Evans Thursday said high levels of unemployment and projected low inflation make more accommodation "appropriate," but stopped short of calling outright for a third round of quantitative easing.
Evans, who dissented in favor of additional monetary easing at the November and December FOMC meetings and serves on an FOMC subcommittee on communication, was presenting a paper at the Brookings Institution co-written with Chicago Fed economists Jeffrey Campbell, Jonas Fisher and Alejandro Justiniano.
Evans said that by the end of 2014 -- the earliest likely time frame the Fed's policymaking Federal Open Market Committee has said it expects to begin raising the federal funds rate -- unemployment levels may call for an extension of zero rates.
But he suggested it may be uncomfortable for the FOMC to announce a further calendar date delay in rate hikes.
Instead, Evans reiterated his call for economic triggers to replace the current calendarized version of "forward guidance." If the FOMC instead were to announce that it will keep the funds rate near zero so long as unemployment stays above 7% and so long as inflation doesn't go above 3%, then Evans said the FOMC might be forced to keep the funds rate near zero beyond "late 2014."
Evans said the unemployment rate of 8.3% is "substantially above reasonable measures of the natural rate." He estimated that the "output gap" is "probably 5 to 6%." And he said "underlying inflation measures are projected to be below our 2% objective for a number of years."
Given those conditions and projections, "clearly, more accommodation would be appropriate," he said.
Evans cited Fed research done by, among others San Francisco Fed President John Williams, showing that, were it not for the zero lower bound on the funds rate, economic conditions "would call for substantially more accommodation than anything we have tried to date."
At its March 13 meeting, the FOMC reiterated its expectations that "economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
Some Fed officials, not to mention the federal funds futures market, think the funds rate will need to be raised much sooner, but Evans suggested that even late 2014 may not suffice.
"By the end of 2014, core inflation is closer to our explicit objective," he said. "However, the endpoint for unemployment seems high relative to any rate that would be consistent with the FOMC's mandated goal of maximum sustainable employment."
"Compared with this baseline scenario, extending the time the FOMC keeps the federal funds rate at zero would bring policy closer to the optimum," Evans said. "However, it is well known that central bankers are genetically disinclined to push the limit of monetary accommodation very far in this direction."
If, instead of a calendar date, the FOMC adopted his "7/3 threshold," and if unemployment remained above 7% while inflation remained below 3%, then "the funds rate could remain low for a longer period."
But Evans allowed for deviations from his threshold rule.
For example, "under faster deleveraging, unemployment falls faster and inflation rises by more," he said. "In that scenario, the economy crosses the 7% unemployment threshold in 2012:Q3, and reaches the 3% inflation threshold in late 2013."
"Therefore, adherence to the 7/3 threshold policy dictates liftoff from the ZLB in late 2012," he said, again referring to that particular scenario.
"Given the improvement in the economy and labor markets, an earlier exit seems palatable," he said. "Even without the 7/3 exit, the endpoint with 3% quarterly inflation and below 6% unemployment is a potentially better dual mandate outcome than today's situation."
Evans also voiced concern that the FOMC might be tempted to tighten monetary policy too early -- to raise the funds rate before late 2014.
"As the economy accelerates and inflation rises, circumstances will tempt any conservative central banker to renege on these promises," he said.
Responding to economists critiquing the paper he presented, Evans repeated his view that high unemployment and projected low inflation calls for an even more accommodative monetary policy.
And he reiterated his support for using a more "state contingent" form of "forward guidance" by the the Fed's policymaking Federal Open Market Committee.
"The evidence screams out that we should have more accommodation," said Evans, "but I could be wrong."
He defended his proposal to have the FOMC announce that it will keep the federal funds rate near zero so long as the unemployment rate is above 7% and so long as inflation does not go above 3%, saying that his would give the Fed flexibility to adjust rates if necessary to guard against higher inflation.
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