WASHINGTON — Chicago Federal Reserve Bank President Charles Evans said Thursday the central bank might be able to end its aggressive support for the economic recovery via asset purchases before the jobless rate falls to 7.0%.
"I'm optimistic that momentum's going to pick up this year," Evans said in an interview on CNBC.
He warned, however, that if fiscal policy turns out to be a greater drag on growth than currently expected, the Fed might have to do more to ensure the fragile recovery maintains its course.
The Fed is currently engaged in an open-ended program buying $85 billion a month in longer term Treasury securities and mortgage-backed bonds.
Asked when the Fed could begin tapering these purchases, Evans said he would like to see jobs being added at a rate of 200,000 a month and the unemployment rate heading down towards 7.0%.
"I tend to think it might be possible to turn off the quantitative easing," Evans said. "We might be able to stop before 7%.
"I'm open-minded," he said, noting that the Fed's unconventional policies have done a lot of good for the economy.
Evans predicted the U.S. economy to grow by 2.5% this year, against a 1.0% drag from fiscal policy. However, "If we have more of a drag this year, that's more of a headwind, that might mean we have to do a little bit more," he cautioned.
For how, the Fed has the appropriate policies in place to respond effectively to the challenges facing the economy, he said.
There are currently a few "abnormalities" in the unemployment rate, Evans said, but once growth is back to being clearly above trend quarter after quarter, unemployment will fall.
"Once we get momentum and we achieve escape velocity — either later this year or 2014 — I think unemployment will move down with momentum," he predicted.
The Fed's policymaking Federal Open Market Committee, on which Evans holds a voting position this year, has said it will keep short term interest rates at exceptionally low levels until unemployment falls to 6.5% or inflation rises to 2.5%. Evans said he does not see the jobless rate "in the 7% vicinity" until the end of 2014.
As for the 6.5% unemployment threshold, that will not be reached until the middle of 2015, he added.
"I think we have pretty appropriate policies in place right now," Evans said, adding that he is "extremely pleased" with where Fed policy is.
He said one thing the Fed wants to make absolutely clear is that monetary policy will continue to be accommodative until there is substantial improvement in conditions "and we get out of this slow-growth economy."
Using the analogy of the Fed as a runner in a half-marathon, Evans said "we are going to keep policy low until the unemployment rate is 6.5%. If we still feel good, with the run, we might go on a little bit longer."
So the Fed will continuing with its large-scale asset purchases until it is clear that the labor market outlook has improved, he said. "It might be half a year, might be a whole year — could be longer."
Evans said what he wants to see — which is "completely achievable" — is job growth of 200,000 a month over a six-month period, as well as growth above potential to reinforce the labor market improvement.
And after ticking up to 7.9% last month, "we need to really see the unemployment rate turn in its direction," he added.
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