–Wants Clarification On FOMC Statement To Incl Threshold Policy

By Alyce Andres-Frantz

LAKE FOREST, Illinois (MNI) – Chicago Federal Reserve Bank
President Charles Evans Wednesday reiterated his desire for more policy
accommodation, even at the cost of higher inflation, and for the Fed to
provide some clarity on threshold policy not tied to a specific date.

Evans, who is at the end of his turn as a voter on the
policy-setting Federal Open Market Committee, and was the lone dissenter
at the December meeting, told the Rotary Club of Lake Forest and Lake
Bluff, Illinois that the U.S. is not “very far from getting the economy
going, but still a lot of ifs.”

Those ifs, Evans said, include the possible need for more monetary
policy accommodation, whether Congress and President Barack Obama agree
on a fiscal package with additional stimulus, and clarifying the
regulatory environment.

“I would like to tell you recent policy actions were enough to get
the economy going, but I am not sure that is the case. I would like to
do more even if at the cost of higher inflation,” Evans said in response
to a question after his speech.

“We are not doing so well on employment but inflation is certainly
low,” Evans said.

“Short term rates are low and economy is not performing well,” he
said. “That indicates there is still very tight financial conditions in
place. If we could get to a place of more accommodative policy, the
situation would get much better.”

The Fed currently has $2.75 trillion in accommodation on place, he
said. While that number was criticized by many, “when economy starts
growing strongly, employment comes down and momentum gets going, the
Fed’s balance sheet will be more appropriate. I would anticipate a
bigger balance sheet (than the) $800 billion in 2007 but less than
current level.”

This downturn was “horrific in size and amplified by a housing
boom,” he said, and while housing previously contributed to recoveries,
but not this time. Moreover, the fact that layoffs were permanent rather
than temporary exasperated the recession.

Evans also said the Fed could help the economy by clarify its new
explicit framework communications.

Speaking to reporters after the event, Evans said, “My own
preference is to first state guidance on Fed Fund rate being zero until
thresholds are hit, then see how the economy is reacting. If it is not
responding, do more asset purchases.”

Asset purchases, while not specific as to which ones, “could look
like $600 billion over time, and then reassess,” Evans said, noting that
“once you have clarity on short term interest rates to be low, that in
of itself provides some accommodation.”

He told the audience he advocates clarification on the FOMC
statement that the threshold policy is to maintain a very low Fed funds
rate not tied “to a calendar date, but linked it to a drop in
unemployment below 7%, and inflation at 3% on a 3-years forward basis.”

Evans said while there is some fixation on keeping the Fed Funds
rate low through 2012, the Fed certainly “put that in play and now you
have to wonder if that continues to be the appropriate date.”

In addition, “On the real side mandate, we need clarification on
what is real employment,” Evans said. “All this is very much in line
with my commentary on the dual mandate.”

Evans told both the press and audience that the U.S. economy is
just on the brink of improving. If business saw more demand, they would
need to hire more workers, and that would translate into more demand and
consumption, Evans told reporters. The critical shift will take place
once the shift takes place from private to the public sector.

The recovery since the end of the recession in June 2009 “has been
pretty weak,” Evans told the audience, and this to some extent
validates concerns on when the economic weakness will be over.

But he said, “If we can get GDP going then debt-to-GDP ratios will
improve dramatically.”

–email: aandres@marketnews.com

** Market News International Chicago Bureau: (708) 784-1849 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]