The Federal Reserve needs to do more to keep money flowing through the economy because the recovery hasn't been forceful enough, Chicago Fed President Charles Evans, a known backer of additional easing, indicated Monday.
Speaking in Hong Kong, Evans echoed Boston Fed President Eric Rosengren and San Francisco Fed President John Williams, both of whom have gone on the record recently calling for further steps to make dollars easier to come by.
"Yes, we have substantial liquidity already in place in our financial system," Evans said. "On the surface, this looks like substantial monetary accommodation. But as a large body of economic theory tells us, for this liquidity to be sufficiently accommodative, the public needs to expect that we will keep it in place for as long as is necessary to restore the economy to a sound footing."
Evans said he believes the Fed should clearly state that the fed funds target rate, currently at 0%-0.25%, won't go up until the U.S. unemployment rate drops under 7%. The Labor Department reported the official rate at 8.3% in July.
"Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation," he said.
Important to note is that while Evans said he didn't believe adopting that policy would create "a major problem with inflation," he acknowledged that view might be wrong. As a result, he advocated ending the promise to keep rates low if projections for medium-term inflation exceed 3%.
Evans said he felt the Fed's decision to extend Operation Twist in June was useful, but the central bank still has to do more. "I believe it is time to take even stronger steps, such as the purchase of more mortgage-backed securities, to increase the degree of monetary support for the recovery," he said, adding that they could be "open-ended purchases" that wouldn't end unless there were clear signs the economy was improving.
Opposing the Evans position are the bankers who think the Fed in fact has already done enough and shouldn't get more involved from a monetary standpoint. Dallas Fed President Richard Fisher has said for several months that policy makers have done all they need to do, a position he restated earlier this month. His economic view is more in line with Richmond's Jeffrey Lacker and Philadelphia's Charles Plosser, with all three expressing concerns that easy monetary policy and extended low rates raise the risk of inflation.
Evans' comments come just days before the Fed's annual gathering in Jackson Hole, Wyo., gets under way. At this year's version, Fed Chairman Ben Bernanke plans to speak about the actions that have been taken since the 2008 financial crisis. Though it isn't necessarily likely he'll make any explicit guarantees about bond purchases or other steps, his speech will be used by traders and investors to speculate about whether and when the Fed might move again.
Cleveland Fed President Sandra Pianalto, who has been in favor of monetary actions by the Fed, is also speaking Monday.
As always, let us know where you stand. Should the Fed do more, as Evans suggested? Or has it, as Fisher contends, done enough?
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