–No Inflation Pressure Until Unemployment Down to 5% to 5.5%

By Yali N’Diaye

WASHINGTON (MNI) – Chicago Federal Reserve President Charles Evans
affirmed Thursday that the accommodative monetary policy stance remains
beneficial to meet the Fed’s dual growth and inflation mandate, which
have so far been missed.

In a speech prepared for the Rockford Chamber of Commerce in
Rockford, Illinois, Evans underlined that at this point, there is no
conflict between the growth and inflation mandates, with inflation
likely to remain low — even lower than what the Federal Open Market
Committee forecasts — over the next two years.

Answering questions afterward, he said he doesn’t expect inflation
pressures to build until the unemployment rate is much lower, around 5%
to 5.5%.

“To put it bluntly, with unemployment too high and inflation too
low – and both forecasted to stay that way over the next two years – we
have missed on both of our policy objectives,” Evans said in a speech
focused on the “Slow Progress Toward Our Goals.”

“There is currently no policy conflict between improving the
employment and inflation outcomes,” he continued. “This leads me to
conclude that accommodative monetary policy continues to be beneficial
for achieving each of these goals.”

As a result, to return growth to a level more consistent with the
Fed’s mandate, Evans, a voting member of the Federal open Market
Committee this year, stressed the need to keep policy rates “low for and
extended period.”

While rising commodity prices have spurred inflation concerns,
Evans pointed out that “the prices of many everyday categories of
expenditures have increased very little or even have declined some.”

With the economic recovery having been “disappointing,” he expects
inflation to be lower than the path suggested by the FOMC’s forecasts
released Tuesday over the next two years.

“All else being equal, bringing expectations of inflation back more
quickly to 2 percent could translate into a helpful decline in real
short-term interest rates,” and so would be helpful, albeit only
modestly, in “realizing a more accommodative policy stance.”

And should inflation overshoot as a result of the Fed’s strategy,
“we have the tools to tighten quickly as needed.”

He did acknowledged that recent data have come on the stronger side, which
he called an “encouraging” development.

He noted that households and businesses have been less cautious,
supporting spending along with the improving financial markets.

What’s more, growth abroad should support U.S. exports.

That said, Evans expressed more concern about the inability of the
recovery to create jobs rapidly enough, while the economy still faces
headwinds from the weakness of the housing market and, concerns over the
state and local fiscal situation and “still somewhat restrictive credit
terms for some borrowers.”

So while the FOMC is forecasting that real GDP would rise from
3.4%-3.9% this year to 3.7%-4.6% in 2013, Evans stressed that even 4%
would not be strong enough to “to reduce unemployment very rapidly
within a reasonable timeframe.”

So “We still have a long road ahead before we return to full
utilization of the economy’s productive capacity and meet this piece of
our policy goals,’ Evans concluded.

Answering questions, Evans said of the unemployment rate where
inflation pressures begin to mount, “Over time that rate can change but
for now (it’s) in the range of 5% to 5.5%. I think we would not see
inflationary pressures until the economy improves to that point.”

He said inflation has more to do with the global economy than the
U.S.’s domestic economy or monetary policy and if inflation ever rises
too quickly, “We would want to change the size of our balance sheet.”

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

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