Fed's Evans: not yet time to cut bond purchases
MADISON, Wisc. Oct 17 (Reuters) - The Federal Reserve should not trim its massive bond-buying stimulus until gains in the U.S. job market are more solid, and may need to keep interest rates low until the jobless rate drops below 6 percent, a top Fed official said on Thursday.
The Fed has kept short-term interest rates near zero since December 2008, and is buying $85 billion in Treasuries and housing-backed bonds each month to lower long-term borrowing costs and encourage investment and hiring. Investors had expected the Fed to start trimming that program last month on the back of a drop in unemployment, but the Fed decided to wait for more data before making any policy change.
"I believe this program should continue until we are confident that there has been a sustainable improvement in the labor market," Chicago Federal Reserve Bank President Charles Evans, who supported the Fed's decision last month, said in remarks prepared for delivery to the Wisconsin Real Estate and Economic Outlook Conference. "It is not yet time to remove accommodation."
Even after the Fed does end its bond-buying program, it will take its time before raising rates, said Evans, who is a voting member this year on the Fed's policy-setting committee.
The Fed, using a formula that Evans devised, has promised to keep rates near zero until unemployment -- now at 7.3 percent -- falls to at least 6.5 percent.
But with excessively low inflation likely to take several years to return to the Fed's 2-percent target, Evans said Thursday, the central bank may end up needing to keep rates low much longer.
"I can easily envision certain circumstances in which the unemployment rate could go below 6 percent before we moved the fed funds rate up," Evans said. "In answer to the questions of how much longer and whether we are near the endpoint for policy accommodation, I decidedly say no."
Evans is among the Fed's most dovish policymakers, but over the past year his views have been in line with the majority at the Fed.
Evans said he expects the U.S. economy to grow about 3 percent next year, pushing down unemployment to a bit below 7 percent by the end of next year. A recovery in housing prices and an increase in stock prices will likely buoy growth, he said, although downside risks -- from U.S. fiscal policy, as well as from weak growth overseas -- do remain.
He added that he would need to see more people coming back into the labor force to seek work, along with a falling unemployment rate and stronger economic growth, to be confident that labor market gains are solid enough to reduce Fed bond buying.
Echoing a sentiment expressed by a few other Fed officials, Evans argued that the precise timing of the Fed beginning to trim bond-buying is not as important as the ultimate size of the program. By its end, he said, the current bond-buying program will likely total about $1.25 billion.
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