Chicago Fed Chief Calls For ‘Substantial’ Monetary Easing

Charles Evans Federal Reserve Chicago

[credit provider=”AP”]

Charles Evans, head of the Chicago Federal Reserve, said this morning that he believes “substantial” easing is necessary by the Federal Open Markets Committee to accommodate an economy that continues to struggle.In a speech at the Rotary Club of Lake Forest and Lake Bluff, Illinois, Evans said that the Fed should keep rates at “exceptionally low levels” so long that unemployment remains above 7%.

“Given the high unemployment rate and low job growth, I think it is clear that the Fed has fallen short in achieving its goal of maximum employment,” he said.

The FOMC currently forecasts the unemployment rate will remain above 8.5% through 2012, only to fall to 8% in 2013.

“The traditional course of action when inflation is below target and real output is expected to be below potential is to run an accommodative monetary policy,” Evans said. “I support such accommodation today. And I believe the degree of accommodation should be substantial.”

Evans was the sole dissenter at the past two FOMC meetings, saying greater action was needed by the Fed to bolster the economy.

At present, the central bank is tasked with targeted inflation of 2% per annum. However, the U.S. is on course to show core price increases of only 1.8% in 2012, with inflation falling as low as 1.5% in 2013 and 2014.

Evans is calling on the institution to increase its target to 3%, so it can more meaningfully impact the employment picture. His reasoning, the current liquidity trap:

This market dynamic is thwarted in the case of a liquidity trap. That is, when desired savings increase a great deal, nominal interest rates may fall to zero and then can go no lower. Real interest rates become “trapped” and may not be able to become negative enough to equilibrate savings and investment. That is where we seem to be now—short-term, risk-free nominal interest rates are close to zero and actual real rates are modestly negative, but they are still not low enough to return economic activity to its potential.
A liquidity trap presents a clear and present danger of a prolonged period of economic weakness—today that means a risk of repeating the experience of the U.S. in the 1930s or that of Japan over the past 20 years.

However, the most recent research shows that improved economic performance during a liquidity trap requires the central bank, if necessary, to allow inflation to run higher than its target over the medium term. Such policies can generate the above-trend growth necessary to reduce unemployment and return overall economic activity to its productive potential.

The FOMC meets next for two days of meetings on January 24 and 25. Evans will not receive a vote in 2012, but will again in 2013