Evans suggests Fed drive up inflation

By Reuters
Posted Oct. 5, 2010 at 1:45 p.m.

The U.S. Federal Reserve should do “much more” monetary easing to spur a sluggish economic recovery, a top Fed official said in an interview published Tuesday.

“In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should,” Chicago Federal Reserve Bank President Charles Evans told the Wall Street Journal.

“This is a far grimmer forecast than we ought to have,” he said, for which reason he favors “much more accommodation than we’ve put in place.”

The U.S. unemployment rate in August ticked up to 9.6 percent, and government figures to be released Friday are expected to show a further increase to 9.7 percent.

Evans, who rotates into a voting position on the Fed’s policy-setting committee next year, stands on the dovish end of the spectrum at the Fed, concerned more with high unemployment than with the threat of inflation.

That puts him in the company of the most influential members of the committee, including New York Fed President William Dudley, Board Vice Chairman Janet Yellen and Chairman Ben Bernanke.

Dudley’s comments last week that he favored more accommodation unless the economy improves substantially were widely taken by market participants as a virtual promise of action at the Fed’s next policy-making meeting, on Nov. 2 and 3.

Many analysts expect the Fed to boost bond purchases at that time, despite recent public comments from some officials critical of the idea, including Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser.

Evans said he favors more asset purchases but worries that that alone would not be enough, the Journal reported.

He said the Fed should consider ways to push inflation higher  to bring down the real cost of credit.

The Fed might aim to overshoot its informal 2 percent inflation target for a time to make up for lost ground, he said, according to the Journal. Dudley has also suggested the Fed consider this tool, known as price-level targeting.

“That is a potentially useful policy tool at this point and I definitely think we should study it more,” Evans said.

“It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment is lowered, that would be one channel for stimulating the economy,” he said.

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