Fed’s Evans: Economic recovery ‘extremely modest’

By Dow Jones Newswires
Posted Aug. 24, 2010 at 3:18 p.m.

Federal Reserve Bank of Chicago President Charles Evans said Tuesday the economic recovery is “extremely modest” but he believes it’s unlikely the economy will fall into a double-dip recession.

The pace of recovery from the worst economic meltdown since the Great Depression is “slower than we had hoped for,” said Evans. He acknowledged that although the risk of a double dip is higher than it was six months ago, it is “not the most likely outcome.”

Recent economic figures point to a faltering economy, including surprisingly weak housing data, released after Evans’ remarks Tuesday to the Indianapolis Neighborhood Housing Partnership.

Sales of existing homes dropped a record 27.2% in July to their lowest level in 15 years.

In recent weeks, investors have also become increasingly worried about the ailing job market. August’s unemployment rate stood at 9.5%.

When the economy is doing well, the jobless rate should be around 5%, Evans said.

He sees unemployment falling to a still troubling 8% next year. Evans described the current job market environment as “very challenging.”

Later, Evans told reporters that he is “increasingly uncomfortable with the lack of improvement in the labor market.”

With a very slow recovery and inflation running below his 2% definition of price stability, Evans deemed the Federal Reserve’s accommodative policy as “appropriate.”

The U.S central bank has held the short-term federal-funds rate near zero since December 2008. The Fed also took steps at its most recent meeting on Aug. 10 to reinvest maturing mortgage-backed securities, or MBS, by purchasing longer-term Treasurys.

Not reinvesting MBS proceeds would have amounted to a “passive tightening,” said Evans.

More aggressive quantitative easing measures will be considered if the Fed becomes “more unsure” about the sustainability of the recovery, Evans said.

“I am constantly reassessing my outlook,” he said.

He added that he will soon revise downward his projection for 3.5% growth this year.

The Fed official declined to say whether the central bank was too quick in ending its initial quantitative easing campaign, which included purchase of $1.25 trillion in MBS and $300 billion in Treasurys.

The Fed made the decision to make the purchases in March 2009.

“We followed through with that decision,” Evans said.

In prepared remarks to the non-profit housing group, Evans spoke of ways to reduce home foreclosures. He encouraged more aggressive financial literacy campaigns, suggesting educating prospective borrowers about the home-buying process might be more effective than strict regulations.

Too many regulations, said Evans, might reduce options for borrowers qualified for high-risk mortgages.

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One comment:

  1. jack (me) Aug. 24, 2010 at 1:02 pm

    The first 3 paragraphs state a problem, but the rest of the article has basically nothing about it, i.e., how did we get to the point where banks don’t keep their mortgage loans, and now that 90% or more of the mortgage market is Fannie, Freddie, FHA, or VA, how to do anything going forward?