By Steven K. Beckner

(MNI) – Chicago Federal Reserve Bank President Charles Evans said
Friday that U.S. monetary policymakers “can and should take additional
steps” to promote faster economic growth.

Evans did not explicitly call for another round of quantitative
easing — something he has favored in the past — but called again for
announcing more explicit economic “triggers” to clarify that the Fed
won’t raise the federal funds rate from near zero so long as
unemployment is above 7% and inflation is 3% or less.

Evans, who dissented in favor of additional monetary easing at the
November and December Federal Open Market Committee meetings, called 3%
inflation” a risk that we should be willing to accept” and a rate that
“isn’t high enough to unhinge long-run inflation expectations,”
according to a speech prepared for delivery to an International Research
Forum on Monetary Policy in Frankfurt, Germany.

At its Jan. 25 meeting, the FOMC extended the expected period of
zero rates “at least through late 2014,” announced a 2% inflation target
and incorporated federal funds rate forecasts into its Summary of
Economic Projections.

Evans, a member of Fed Vice Chair Janet Yellen’s subcommittee on
communication, said those steps, while welcome, did not go far enough.
And there “mere chance” that the FOMC might raise the funds rate
before unemployment has fallen below 7% “may be diminishing” monetary
accommodation.

On a day when the Labor Department announced a 0.4% February rise
in the consumer price index (a near 5% annualized inflation rate), Evans
called inflation “very low … perhaps too low.”

He put much more emphasis on high unemployment, saying the 8.3%
jobless rate is “a 2-1/4 to 3 percentage point deviation from our
current maximum employment objective.”

Evans seemed unimpressed by the economy’ recent performance.

“I believe it’s hard to say that we are not in a liquidity trap,”
he said.

“Recently, the U.S. data have been more encouraging, with the labor
market improving and private demand showing a little more traction,”
Evans said, calling those “welcome developments.”

“But even the more optimistic forecasts see output increasing only
moderately above its potential growth rates; no one has an expectation
for a surge in activity that would quickly close resource gaps,” he
continued. “At the same time, the outlook for inflation is subdued …
Furthermore, private sector long-run inflation expectations are quite
well anchored.”

And so Evans reiterated his desire to see the FOMC “committing to
keep policy rates exceptionally low until certain observable economic
triggers are met that would be consistent with the economy being well
past the liquidity trap.”

As he has done before, Evans said the FOMC “could sharpen its
forward guidance by pledging to keep policy rates near zero until one of
two events occurs:

* “The first event would be if the unemployment rate moved below a
7% threshold …”

* “The second event that would commit us to raise rates would be if
inflation rises above a particular threshold that is clearly
unacceptable. … I would argue that this inflation-safeguard threshold
needs to be well above our current 2% inflation objective …”

“My preferred inflation threshold is a forecast of 3% over the
medium term,” he said. “For a central bank like the Federal Reserve that
has a statutory dual mandate, this seems like a risk that we should be
willing to accept.”

“We would suffer some net policy loss if the gains in employment
did not occur,” Evans conceded. “But we certainly have experienced
inflation rates near 3% in the recent past and have weathered them well
… And 3% isn’t high enough to unhinge long-run inflation expectations”

Evans said “a 7/3 threshold policy would more clearly convey a
commitment to the degree of accommodation I think we need.”

He objected to talk that the FOMC may raise rates before late 2014.

“Suppose as we move through next year that our projections for 2014
have an unemployment rate above 7% and inflation close to 2%,” Evans
said. “Some might argue then that the economic conditionality in the
statement has been met and we should begin to remove accommodation.”

But “to me, in the absence of some new compelling evidence about
the natural rate of unemployment or an unhinging of inflation
expectations, this would represent an unwarranted tightening of policy,”
he went on. “Indeed, the mere chance that this may occur may be
diminishing the degree of accommodation in place today.”

Evans concluded by saying “I have undoubtedly generated some
discomfort in the room tonight by saying that even with the large degree
of accommodation already in place, monetary policy can and should take
additional steps to facilitate a more robust economic expansion.”

“But I believe a greater risk today is that we buy too quickly into
thinking that the equilibrium rate of unemployment has jumped 2 or 3
percentage points or that long-run inflation expectations have become so
fragile that they are on the verge of spiking well above 2%,” he said.

“I just don’t see the evidence out there supporting this view,” he
continued. “But if we do buy into it, then we’ll end up following overly
restrictive policies that could unnecessarily risk condemning the U.S.
economy to a lost decade — or even more. And the costs of taking this
route would be unacceptable.”

** MNI Washington Bureau: 202-371-2121 **

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