–To Face Unemployment ‘Well Above’ Sustainable Levels For Some Time
–Would Have Preferred FOMC Announce More MBS Buys After June FOMC Meetg
–Asian Econs Will Not Be Immune To Adv Econs ‘Tepid’ Growth Prospects

By Brai Odion-Esene

WASHINGTON (MNI) – Chicago Federal Reserve Bank President Charles
Evans Monday argued that current economic conditions call for “extremely
strong” action from the central bank, warning of damage that will
leaving lasting scars on the U.S. economy if nothing is done to tackle
the stubbornly high unemployment rate.

In remarks prepared for the Saging Bangkok Forum in Thailand, Evans
predicted the U.S. jobless rate will likely remain “well above”
sustainable levels for some time, and cautioned that Asian economies,
down the road, are likely to be confronted by the weak growth outlook
currently facing the U.S. and other advanced economies.

He also made the case again for tying future monetary policy to the
Fed’s progress on boosting job growth, and said he would have preferred
the Fed’s policymaking Federal Open Market Committee to announce
additional purchases of mortgage-backed securities following its June
meeting.

Evans is a voter on the FOMC next year.

Evans acknowledged there is already “substantial liquidity” in place
in the U.S. financial system, but that “with huge resource gaps, slow
growth and low inflation, the economic circumstances warrant extremely
strong accommodation.”

The U.S. is not experiencing stronger growth right now, so Evans
said he supports using the Fed’s balance sheet to provide additional
accommodation.

“I think our action in June that continued our Maturity Extension
Program was useful; but I would have preferred an even stronger step,
such as the purchase of more mortgage-backed securities,” he said.

The additional monetary easing is needed, he said, “to more quickly
boost output to its full potential level.”

He cited the still-unresolved European debt crisis, as well as the
looming fiscal cliff in the United States, and the “substantial downside
risks” they pose, underlining the need for “a high degree” of monetary
stimulus.

Evans said the crisis in Europe could have a severe impact on the
U.S. either through financial contagion, or by spooking skittish U.S.
businesses and households.

“Every hint of bad news seems to generate a wave of increased
caution and an associated pullback in spending as firms and families
seek to protect their individual balance sheets,” he said. “So it would
be no surprise if yet another wave of uncertainty put a further dent in
consumption and investment.”

As for the fiscal cliff, Evans warned how the public back-and-forth
by lawmakers could cause “already jittery” business and consumers to put
spending plans on hold.

“In sum, a messy resolution to the fiscal cliff problems presents
an important downside risk to U.S. growth prospects and, by extension,
to world economic growth,” he said.

“Even absent any negative shocks, such tepid growth rates would
close the large existing resource gaps only very gradually,” Evans said.
“Indeed, I expect that we will face unemployment well above sustainable
levels for some time to come.”

As for Asian economies, Evans warned that despite the pickup in
growth in recent years, “they will not be immune to the tepid growth
prospects that the U.S. and other advanced economies are now facing.
Indeed, the weaker outlook for the U.S. and euro area has already
contributed to reduced growth forecasts in Asia.”

Counseling against any hesitancy on the part of the Fed, Evans said
finding a way to provide more stimulus — “whether it is monetary or
fiscal” — is particularly important now because any delay in lowering
unemployment would prove costly.

He cited the “unusually large percentage” of unemployed workers who
have been without jobs for quite an extended period of time — “their
skills can become less current or even deteriorate” — and how the
resulting lower aggregate productivity also weighs on potential output,
wages and profits for the economy as a whole.

“The damage intensifies the longer that unemployment remains high.
Failure to act aggressively now will lower the capacity of the economy
for many years to come,” he said.

Evans indicated a willingness to tolerate inflation above the Fed’s
2% target in pursuit of better news on the jobs front, especially with
the unemployment rate currently 2 to 3 percentage points above its
sustainable rate.

“I support a conditional approach, whereby the federal funds rate
is not increased until the unemployment rate falls below 7%, at least,
or until inflation rises above 3% over the medium term,” he said.

Evans argued that the policy would clarify the Fed’s forward policy
intentions greatly and provide a more meaningful guide on how long the
federal funds rate will remain low. The FOMC currently says it expects
rates will stay low until at least late 2014.

“Clarification would increase both transparency and accountability.
Importantly, it would help markets better anticipate Fed actions,
creating one less source of risk for economic agents to manage,” he
said.

In addition, Evans said he does not foresee “much risk that
inflation will rise above reasonable tolerance levels relative to this
(2%) objective.”

He noted the output gap remains large and likely to close “only
slowly,” and that wage pressures are “practically nonexistent” in the
current economic environment.

“It is hard to envision how we could see major persistent inflation
pressures without a parallel increase in wage costs,” Evans said, and
concluded that inflation will likely remain near or below the 2% target
over the medium term.

Some have warned that the Fed’s swollen balance sheet raises the
risk of soaring inflation down the road, but Evans sought to defang this
argument.

He noted that despite a balance sheet that has ballooned in size to
almost $3 trillion since 2007, the dire predictions regarding inflation
have not come to pass.

“Low long-term Treasury rates support the view that markets are
looking for only modest economic growth with low inflation, and a there
is a high degree of caution out there — which itself is an important
factor holding back economic activity today,” he said.

** MNI Washington Bureau: 202-371-2121 **

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