By Steven K. Beckner

CHICAGO (MNI) – Chicago Federal Reserve Bank President Charles
Evans said Friday that an accommodative monetary policy remains
“appropriate,” but suggested he does not see a need for further
large-scale asset purchases beyond the $600 billion of long-term
Treasury security buying scheduled through June.

Evans said that at the conclusion of those purchases a first step
toward firming monetary policy could be for the FOMC to instruct the New
York Federal Reserve Bank’s open market desk to stop reinvesting the
proceeds of maturing mortgage-backed securities, but he said such a step
should not be taken immediately.

Evans, a voting member of the Fed’s policymaking Federal Open
Market Committee this year, said letting maturing MBS run off, thereby
shrinking the Fed’s balance sheet, as the Fed was doing up until last
August, should only come after some period of time and after the FOMC
has had time to reassess the economy’s trajectory.

Although the economy has improved and although disinflation risks
have receded, Evans said “an extended period” of very low interest rates
is still needed. He downplayed the threat of inflation rising above the
Fed’s implicit target range of 1.6% to 2.0%, saying the spike in oil and
other commodity prices will likely have only a “transitory” effect.

Should inflation rise faster than expected, Evans said he would be
prepared to support an earlier tightening of monetary policy, but
strongly suggested that is unlikely. He was talking to a handful of
wire service reporters over breakfast at the Chicago Fed’s headquarters.

Evans is projecting real GDP growth of at least 4% this year, but
said even at that rate it will take four years to return to full
employment, and he said “slack” in the labor market will hold down
wage-price pressures. He predicted core PCE inflation will not even rise
to 1.5% until 2013.

Evans was a vocal supporter of the second round of so-called
“quantitative easing” or “QE2″ when it was launched last November, and
he said the $600 billion asset purchase program remains “appropriate”
and “sound policy” now even though “the economy definitely continues to
improve.”

“With each month, each quarter there seems to be more momentum,” he
said, adding that business contacts in his industrialized district are
telling him that things are “continuing to improve in the way they
expected …

“They are on their business plan expansion path, and that’s a very
good sign,” he said.

What’s more, “disinflationary risks have certainly diminished,” he
said, adding that “I personally don’t see as many needs for a further
amount” of quantitative easing.

But he said the amount of monetary stimulus which the FOMC has put
in place needs to “stay in place” until the Fed determines that the
economy’s trajectory has changed in a way that requires less
accommodation.

While indicating that additional QE beyond June is probably not
needed, Evans also made clear he is in no hurry to provide less
accommodation.

He recalled that late last summer he began openly calling for more
accommodation because of more sluggish growth, disinflationary trends
and a “liquidity trap” — a situation in which the Fed can no longer
stimulate the economy through short-term interest rate cuts because it
is at the zero bound for the federal funds rate and consumers and
businesses are reluctant to spend money or delay spending in the
expectation of lower prices.

“We’ve obviously improved beyond some of those risks, and I think
they are smaller,” Evans said.

But he added, “That said, short-term interest rates continue to be
extremely low. There continues to be a savings behavior which exceeds
the investment demand, although that is improving …

“(I)n this environment I still think that accommodation is the
right decision,” he went on. “I think our current low rates continue to
be appropriate and will continue to be appropriate for some time — for
an extended period as our statement says.”

With disinflationary risks having “diminished” and the economy
having achieved “a firmer footing,” Evans said, “I think that means that
the type of program that we envisioned with our second asset purchases
of $600 billion … following through on that to the tune of 600 billion
… I think is appropriate.

“And I personally don’t see as many needs for a further amount as I
probably thought last fall,” he said. “Last Fall I thought $600
(billion) was a good start and we would evaluate conditions when we got
to the appropriate times.

“As I look at it I think the economy is doing better, keeping in
mind that after putting 600 billion in place it will stay in place until
other actions are decided upon that will continue to provide
accommodation,” he said. “And our currently low short-term interest
rates, you put those together I think that’s the type of support I
thought we would need.”

-more-

** Market News International Washington Bureau: 202-371-2121 **

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