Fed can start tapering ‘later this year,' says Evans

Reuters
Charles Evans, President and CEO, Federal Reserve Bank of Chicago, takes part in a panel discussion titled "Twist and Shout: The Limits of U.S. Monetary Policy" at the Milken Institute Global Conference in Beverly Hills, California
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Charles Evans, President and CEO, Federal Reserve Bank of Chicago, takes part in a panel discussion titled "Twist and Shout: The Limits of U.S. Monetary Policy" at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012. REUTERS/Danny Moloshok

By Pedro Nicolaci da Costa

GREENVILLE, South Carolina (Reuters) - The U.S. Federal Reserve can begin winding down its bond-buying stimulus later this year as the economy improves, but will likely need to keep official interest rates near zero for another two years, Chicago Fed President Charles Evans said on Friday.

While Evans did not specify an exact month for the start of a reduction in the Fed's purchases of mortgage and Treasury bonds, his timeline appears to make him reticent about making such a move in September, as most investors now expect.

"I do expect, however, that the outlook will materialize in such a way that we'd likely reduce the (asset purchase) rate starting later this year and subsequently wind down these purchases over a couple of stages," Evans told an event sponsored by AgFirst Farm Credit Bank.

"For me, to start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory," said Evans, who is a voting member this year on the Fed's policy-setting Federal Open Market Committee.

Evans said he was hopeful U.S. economic growth would finally break above 3 percent by 2014 following several years of lackluster recovery from a deep recession. He said inflation should slowly creep higher toward the central bank's 2 percent objective.

Evans' remarks vacillated between cautious optimism and a sense of disappointment at the anemic pace of recovery, which has left unemployment at a still elevated 7.4 percent. The August employment report is due out at 8:30 a.m. (1230 GMT), and economists in a Reuters poll forecast the economy generated 180,000 jobs last month, up from 162,000 jobs in July.

"Economic fundamentals are much improved. The cyclical repair process is well under way," said Evans, a policy dove who has tended to play down concerns about future inflation.

The labor market has improved since the Fed launched its most recent round of asset buying, currently set at $85 billion per month, Evans said. However, employment conditions are still far from normal, he added.

"The U.S. economy has a long way to go to return to healthy normalcy," he said, adding the economy is still around 5 million jobs short of where it should be at this point.

He noted that inflation can be too low, not just too high, and that the Fed should monitor price trends closely to make sure inflation, currently hovering around 1.2 percent, moves closer to the central bank's 2 percent target. He stressed this objective was a target, not a ceiling, and that the Fed should aim for that rate as an average over time, even though it has undershot that level for several years.

Evans said he was worried about discouraged workers dropping out of the labor force and demographic factors alone cannot explain the recent decline in labor force participation.

"It could take a long time for us to return to our 2 percent inflation objective, and I will be monitoring our progress closely when making my decision about appropriate monetary policy," Evans said.

(Editing by Lisa Shumaker and Chizu Nomiyama)

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