— Current Accomodative Policy Appropriate for 3 to 4 Fomc Meetings

By Steven K. Beckner

CHICAGO (MNI) – Chicago Federal Reserve Bank President Charles
Evans raised the possibility Thursday that contagion effects from the
Greek debt crisis could further dampen already weak American bank
lending.

Evans said it will be appropriate for the Fed’s policymaking
Federal Open Market Committee to keep policy very accommodative for “an
extended period,” which he defined as “three to four meetings.” And he
suggested that adversely changing financial circumstances could well
affect the length of that period.

Evans said that for now he is sticking with an upwardly revised
forecast of 3.5% U.S. economic growth this year. But he said the Fed
will need to monitor repercussions of the southern European debt crisis
and its impact on U.S. financial market conditions and the U.S. economy.

Evans was speaking to reporters on the sidelines of his Bank’s
annual banking conference on a day when shock waves from Europe were
capsizing U.S. stocks and reverberating throughout asset markets. As he
spoke the Dow Jones Industrial Average and other major stock indices
were down 4%. It was reported later Thursday that the U.S. stock market
plunge was partly due to an error at a major company.

The wave of risk aversion sent gold soaring to near $1200 an ounce,
and rising Treasury bond prices sent the yield on the benchmark 10-year
note plunging below 3.5%.

A terse Evans, asked about the impact of the European sovereign
debt maelstrom on the U.S. economy, observed that “things seem to be
moving fairly quickly” and said the “situation in Europe is something we
need to be mindful of.”

He said “my outlook for the U.S. economy continues to be for
moderate growth” and noted that “recent data have been a little
stronger.” He said he believes “the probability of a double dip
(recession) have declined.”

However, “the current situation is a new development,” Evans
conceded, saying “we have to monitor things as they develop.”

Evans was asked by Market News International whether the global
wave of risk aversion could have a chilling effect on bank lending,
which Chairman Ben Bernanke told the conference earlier was still
“tight.”

“When financial distress took place” in the past, he replied, “it
meant lending was reduced.” And he said that would be fortunate, given
that “we have not seen bank lending increase (as much as expected) given
all liquidity we’ve put in place.”

Evans said increased lending is “very important for continued
recovery” and added, “anything that limited that would make the
challenge that much greater in terms of getting unemployment down.”

He said the Fed is monitoring credit spreads and said it must
“think about what (the Greek crisis) means for capital markets.”

“To the extent it’s affecting financial conditions in the U.S. and
around the world,” he said, obviously we’re concerned and “paying
attention to that the way we have over the last two to three years in
the U.S.”

Evans said he is in full support of the FOMC’s statement, which
reaffirmed last week, that the funds rate should stay near zero “for an
extended period.”

As for the likely length of that “extended period,” Evans said,
“The way that I think about our current accommodative condition is in
terms of how the economy is improving, how inflation continues to be
contained–or if in fact there are disinflationary concerns.”

“We’re underunning my guideline for price stability, which is 2%,”
he observed. “We’re at closer to 1 1/2%.”

“So that tells me that accommodative conditions continue to be in
place,” he continued. “To the extent financial circumstances also
support that you know that tells me it’s going to be some time.”

“I’ve said 3 to 4 meetings, six months, depending on circumstances
changing in a big way,” Evans went on. “Everytime we get to the point
where we make a decision like that I look forward and go, ‘I think we
still need accommodative policy for some time.'”

“I don’t look at it in terms of what that means 18 months ahead
because I don’t think that’s essential for the current policy forward
language,” he added.

As for eventual asset sales, Evans indicated he would prefer that
they come only after the Fed first uses reverse repurchase agreements
and term deposits to drain reserves, accompanied by the payment of
interest on excess reserves.

None of this is appropriate now, he said.

While anticipating stronger growth than earlier in the year, Evans
said, “given current conditions of high unemployment, moderate growth
when should be seeing far greater growth and contained inflation and
inflation expectations, accommodation continues to be appropriate.”

“I totally agree” with the FOMC’s “extended period” language, he
said.

“When the day comes to apply more restrictive credit policies,”
Evans aid he is “confident” the Fed’s reserve management tools “will be
enough to do the job.”

For example, he said, “increasing interest on excess reserves” will
give banks an incentive” not to flood the economy with credit, but “that
is not necessary now.”

** Market News International **

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