Fed's Evans: Unemployment, Low Inflation 'Calls for More Accommodation'

WASHINGTON — Federal Reserve Bank of Chicago President Charles Evans said Wednesday the Fed should continue its accommodative policy with unemployment still at elevated levels and particularly in light of challenging fiscal headwinds.

The current unemployment rate, which was last measured at 7.3% for August, and still low inflation "calls for more accommodation," Evans said Wednesday in a panel discussion at the International Monetary Fund. "Economic growth has not been nearly strong enough."

Evans speaking at a seminar addressing "Unconventional Monetary Policies and their Cross-Country Spillovers" said markets and nations do need to better prepare themselves for an eventual withdrawal of easy money. "We certainly recognize that our policies effect on the world economy," Evans said, adding that a strong U.S. economy is important for the global economy.

But Evans, who votes on the Fed's policy making committee this year, said "the U.S. economy has been facing fiscal headwinds for several years now," pointing to the 2011 debt ceiling showdown, the sequester, tax hikes and now the budget impasse which has shuttered the federal government. Asked about the tensions over the debt ceiling in Washington, Evans said "current environment is fraught with uncertainty."

A lot of the panel discussion revolved around how the Fed could better communicate its approach to monetary policy to financial markets and other countries.

"Communicating and explaining what the Fed is doing is one of the most important things we can do," Evans said. He admitted "some frustration" when the message doesn't come across clearly, but said sometimes market participants might "only be paying attention to one part of policy."

Chair Ben Bernanke "has been extremely clear" explaining the multidimensional aspect of policy, Evans said. One of the things the Fed is trying to do, Evans said, "is to communicate that we intend to maintain these policies for some time" despite calls from some to pullback on unconventional policies.

Evans said there is confusion around the definition of thresholds, in part because of differing views from the policy making committee members. "There's some ambiguity in minds of those on outside as to what a threshold is," he said.

Evans also said that with low inflation, the accommodative policies should continue even as the economy passed the current thresholds set out by the FOMC. "I don't think changing the threshold is necessarily essential," he said, adding that markets should understand it's not a trigger. He also said he "could see lowering the unemployment threshold to 6%" if inflation stays low.

The panel included IMF First Deputy Managing Director David Lipton, Bank of Japan Assistant Governor Kazuo Momma, Bank of Mexico Deputy Governor Manuel Ramos-Francia and JP Morgan's Head of Fixed Income Research Joyce Chang.

Lipton echoed the IMF's call for more clarity from the Fed about how it will execute monetary policy going forward. "We're saying the Fed needs to be explaining how it will go about exiting, so markets understand it and other countries understand it," he said.

"We're not calling for exit now," Lipton said, adding that the "tapering talk is not about withdraw of stimulus, but rather it's about taking your foot a little bit off the gas."

As for the timing of an exit from accommodative policy, Evans said, "when we begin to exit, the economy will be on much better footing," Evans said.

He was asked about the size of the balance sheet, Evans said he expects QE3 will have added about $1.25 trillion to the Fed's balance sheet before it's done, but that he doesn't expect the Fed will have to sell off the mortgage backed securities it has accumulated through its QE3 program, but rather could let them roll off the balance sheet as they mature.

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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