–‘Significant Risk’ Global Recovery Might Weaken Further
–Essential to Do as Much as Can to Bolster Econ Resiliency, Vibrancy

ANN ARBOR, Michigan (MNI) – Chicago Federal Reserve Bank President
Charles Evans Tuesday applauded the aggressive stimulus measures
unveiled by the Fed last week, arguing that the state of the economy and
the growing risks to growth required a strong response from the central

However, while fully supportive of the Fed’s recent actions, Evans
urged monetary policymakers not to rest their oars in the effort to get
the recovery back on track, cautioning against being complacent or
“unduly passive.”

“Our economy today is simply not resilient enough. The damage from
the Great Recession was substantial; and to date, the recovery has been
disappointing,” Evans said in remarks prepared for delivery to a
breakfast event in Ann Arbor, Michigan.

And given the recession in Europe and slower growth in previous
economic bright spots such as China, “there’s a significant risk that
the global recovery might weaken further,” he added. “We can’t count on
a boost to U.S. output from robust exports.”

The Federal Reserve’s policymaking Federal Open Market Committee
announced last week that in addition to its maturity extension program,
it will buy $40 billion in mortgage-backed securities a month until it
sees a significant improvement in the labor market. It also pushed out
its forward guidance — how long its expects interest rates to remain
close to zero — to mid-2015 from late-2014.

Evans, who will not be a voter on the FOMC until next year, has
been one of the loudest proponents of additional action by the Fed in
the weeks leading up to last week’s meeting.

“This was the time to act,” he said. “With the problems we face and
the potential dangers lying ahead, it is essential to do as much as we
can now to bolster the resiliency and vibrancy of the economy.”

“I believe the combination of new asset purchases and enhanced
forward guidance about future policy should provide an important added
stimulus to economic activity and hiring,” he declared, adding, “It is
very hard to believe that millions of people who were working
productively just a few years ago have suddenly become unemployable.”

Not only were last week’s additional monetary policy actions in
response to the disappointing pace of the recovery, Evans said they were
also intended to increase the resiliency of the economy in the face of
the “increasing headwinds and greater downside risks” posed by the
slowdown in global economic growth, the economic turmoil in Europe and
the looming U.S. fiscal cliff.

More monetary accommodation by the Fed and greater confidence in
the future would mean a stronger U.S. economy, Evans said, one that
would be more resilient to “a large-scale decline in global growth or a
sharp fiscal retrenchment.”

On Europe, Evans noted that while the current expectation is that a
combination of liquidity support for banks and sovereigns will reduce
financial restraint — allowing individual countries time to make
structural adjustments — “the periphery countries will almost certainly
experience a great deal of pain.”

Closer to home, Evans warned that a fiscal contraction on the scale
of the fiscal cliff would be “a serious threat” to the fragile recovery,
and added that “unfortunately, a political stalemate that triggers
slated spending cuts — an extreme outcome — cannot be ruled out.”

The Fed’s shift away from conducting asset purchases of a fixed
size and timespan towards a more open-ended approach conditions its
actions to the economy’s performance, Evans said.

“And stating that we expect to keep a highly accommodative stance
for policy for a considerable time after the recovery strengthens is an
important reassurance to households and businesses that Fed policy will
not tighten prematurely,” he added.

While declaring his wholehearted support for the Fed’s actions,
Evans nevertheless said he believes there are additional steps the Fed
can take to further strengthen its positive effects on the economy.

He spoke of the risks of being “timid and unduly passive,” warning
that sticking to just “modest, cautious, safe policy actions” risks
inflicting a lost decade on the U.S. economy similar to that which Japan
experienced in the 1990s.

“Underestimating the enormity of our problems and the negative
forces holding back growth itself exposes the economy to other
potentially more serious unintended consequences,” Evans said.

“We cannot be complacent and assume that the economy is not being
damaged if no action is taken. I am optimistic that we can achieve
better outcomes through more monetary policy accommodation,” he

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

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