Federal Reserve Bank of Chicago President Charles Evans said improvements in the economy, labor market and the outlook for inflation aren’t sufficient for the Fed to begin pulling back record monetary stimulus.
“Slow progress in closing resource gaps and a medium-term outlook for inflation that is too low lead me to conclude that substantial policy accommodation continues to be appropriate,” Evans said today in remarks prepared for a speech in Chicago.
Chairman Ben S. Bernanke and the Federal Open Market Committee plan to complete a $600 billion bond purchase program in June while holding interest rates “exceptionally low” for an “extended period,” according to a Fed statement last month. They have yet to settle on a plan for withdrawing stimulus.
“Despite recent improvements to the outlook, we are not yet at that point” where the Fed would adjust the stance of monetary policy, Evans said at the Association for Financial Professionals Global Corporate Treasurers Forum.
Policy makers’ views have begun to coalesce around a strategy to reverse stimulus by first ending their reinvestment policy and later raising interest rates and selling assets, according to minutes of the Fed’s April meeting, which were released yesterday in Washington.
Almost all Fed officials agreed that the “first step toward normalization” should be ceasing reinvestment of principal payments on mortgage debt that began in August. A majority preferred to sell the Fed’s securities after raising short-term interest rates, and most wanted to put asset sales on a preannounced schedule while using their target interest rate as an “active tool.”
St. Louis Fed President James Bullard said in an interview with Bloomberg News yesterday that the central bank may keep its monetary-policy unchanged until late this year, and that declining inflation expectations have curbed the need to begin withdrawing record stimulus.
“Following a deep and lengthy recession, the U.S. economy is now on firmer footing. There are many reasons to be optimistic,” Evans said. “Despite these clear signs of progress, the roughly 3.75 percent growth we anticipate for the next couple years is too low to generate swift relief in the labor market.”
The Labor Department said May 6 that the economy added 244,000 jobs in April with non-government employers adding 268,000 jobs, the best month for the private sector of the economy since 2006. The unemployment rate has been stuck near 9 percent or higher for 25 months.
Evans said it “could take quite some time” for unemployment to return to the 5.3 to 5.5 percent range that most Fed officials would like to see.
Moderate GDP Growth
“Such a forecast for moderate real GDP growth and its implications for slow improvement in the labor market lead me to believe that accommodative monetary policy continues to be warranted to address this part of our dual mandate,” he said.
Evans also underscored the Fed’s message that commodity price increases are likely to prove transitory.
“Inflation is a continuing increase in the price level over time: A one-off increase in the price level is not inflation,” Evans said. “Price increases have to be sustained,” he said, citing data from 1981 to 2010 showing “little systematic relationship” between oil prices and overall inflation.
The national average price of gasoline has risen 38 percent in the last year to $3.91 a gallon as of yesterday. Prices have fallen 8 cents from their peak earlier this month.
Oil Prices ‘Volatile’
“Petroleum prices are quite volatile,” Evans said. “Think about the past few weeks: Oil prices fell about $15 per barrel in a matter of days early in May and have stayed down since then.”
A lack of wage growth is also likely to help restrain further increases in inflation, he said.
“Fires require oxygen to burn. Without it, the fire dies out and the damage is limited,” Evans said. “So without rising wages and incomes, price increases may be difficult to sustain — and sustainability is an important aspect of inflation.”
One caveat that would cause Evans to “reassess my inflation outlook” would be if “medium term inflationary expectations were to rise,” he said.
“If inflation expectations were to start to creep up because of rising commodity prices or any other factor, the FOMC would consider this important development and act accordingly to keep inflation expectations well grounded,” he said.
Evans, 53, has led the Chicago Fed since September 2007 and is a voting member this year of the Federal Open Market Committee. He has been among the FOMC’s strongest supporters of monetary stimulus since last year. He represents a five-state region that includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin.
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