–‘Very Accommodative’ Policy Remains ‘Appropriate’
By Steven K. Beckner
(MNI) – Chicago Federal Reserve Bank President Charles Evans said
Friday that the Fed must “eventually” move to a “more normal stance” of
monetary policy but for now, a “very accommodative” policy remains
“appropriate.”
If the Fed were to leave its easy money stance in place for “too
long,” he said it would “eventually” cause inflation pressures, but if
it removes monetary stimulus “prematurely,” he warned it would “inhibit”
the recovery.
Evans, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee next year, made clear he sees no inflation
threat on the horizon.
Slack resource use “roughly balances out” monetary accommodation,
he said, and predicted core inflation of 1.25% will only rise to 1.75%
in 2012 — still below the 2% which he said is his “guideline.”
Evans, in remarks prepared for delivery to a Wesleyan University
Associates luncheon in Bloomington, Illinois, said he is “optimistic”
that the recovery will continue, but he cited a number of factors
retarding both consumer and business spending and said the economy is
“far below” its potential.
Evans said the labor market may be nearing “a turning point” in
terms of increased hiring of permanent workers, but nevertheless said he
expects unemployment to come down only slowly.
“Currently, policy is, appropriately, very accommodative,” Evans
said after reviewing the economic scene. “But, eventually, we will have
to return to a more normal stance.”
“Judging the appropriate timing and pace for reducing accommodation
poses a significant challenge for policymakers over the next couple
years,” he said.
“On the one hand, removing too much accommodation prematurely could
inhibit the recovery,” he continued. “On the other hand … if the Fed
leaves the current level of accommodation in place too long,
inflationary pressures will eventually build.”
Evans said the FOMC’s decisions “will be based on careful
monitoring of business activity and an alert eye out for signs of
changes in the inflation outlook.”
Noting that the Fed has been developing the tools it will need to
reduce monetary accommodation when the time comes, Evans said, “I am
confident that monetary policy will both support economic growth and
bring and keep inflation near my guideline of 2 percent over the medium
term.”
Those comments were prefaced by an upbeat but very cautious look at
the economy. He also spoke to reporters earlier covering some of the
same ground.
He said “the economy is recovering from the recession, and I am
optimistic that it will continue to do so.”
As he told reporters last week at the Chicago Fed’s banking
conference, Evans said “more upbeat business reports” have caused him to
upgrade his real GDP forecast to about 3.5% this year.
However, “the ‘for sale’ signs posted in yards, empty storefronts,
and long waits for job seekers are powerful reminders of how serious the
recession was and how far below our potential we still are.”
By contrast to this year’s expected growth, he noted that “in the
first year and a half following the deep 1981 to 1982 recession, growth
averaged nearly 8%.”
Consumers have increased spending, but said “concerns remain about
the sustainability of the recent strength,” Evans said.
“The need for households to repair their balance sheets will
moderate growth in consumer spending going forward,” he said. “In
addition, we are seeing reduced availability of household credit. And,
importantly, muted gains in employment will hold back growth in wages
and salaries.”
“All of these factors contribute to an outlook for relatively
modest growth in consumer spending, which, in turn, restrains the
forecast for overall GDP growth,” he said.
Meanwhile, “housing continues to struggle,” said Evans, noting that
both sales and new home construction “fell back after the expiration
last November of the first round of tax credits for first-time home
buyers, and starts have not shown much discernible improvement over the
past several months.”
“We currently are seeing a bit of a pickup in housing markets,” he
said. “But this is likely a temporary boost as buyers rush to beat the
end-of-April expiration date for the extension of the home buyer tax
credits.”
Evans said there has been “a modest improvement in the jobs
picture, but added, “Businesses are being cautious about adding
permanent staffing. They continue to strive to produce more with fewer
people.”
On a more hopeful note, Evans said that “as the recovery takes hold
and businesses become more confident in the future, employment will
increase on a more consistently solid basis. Indeed, there are signals
that we currently are near such a turning point.”
“Nonetheless, even after more solid employment gains materialize,
unemployment may remain stubbornly high,” he went on. “I anticipate that
the rate and length of unemployment will improve relatively slowly.”
Echoing Fed Chairman Ben Bernanke and other Fed colleagues, Evans
said “the availability of bank credit remains a significant headwind for
many small- and medium-sized companies.” He blamed both “tighter lending
standards” and weak loan demand.
“More generally, credit flows are being reduced because both
borrowers and lenders are still dealing with losses from the recession,
especially the busts in residential and commercial real estate,” he
said. “I expect banking conditions to improve and better support growth,
but this is likely to take some time.”
Evans took an even-handed approach to assessing the inflation
outlook, but indicated he sees no significant inflation threat in an
environment of “quite high” unemployment and “quite low” capacity
utilization.
Referring to fears the Fed’s expansion of bank reserves will
generate inflation, Evans pointed out that “most of the funds used to
increase our balance sheet are sitting idly in bank reserves. And
because banks are not lending those reserves, they are not yet
generating spending pressure.”
He added a caveat: “of course, leaving the current highly
accommodative monetary policy in place for too long would eventually
fuel such inflationary pressures.”
But he said, “With core inflation at 1-1/4 percent, I see the
opposing forces of resource gaps and accommodative monetary policy as
roughly balancing out over the medium term. As resource slack abates in
a recovering economy, I expect inflation to move up to about 1-3/4
percent by 2012.”
** Market News International Washington Bureau: 202-371-2121 **
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