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UPDATE 1-Evans, dove among Fed doves, says could cut QE3 faster
January 15, 2014 / 8:40 PM / 4 years ago

UPDATE 1-Evans, dove among Fed doves, says could cut QE3 faster

By Ann Saphir

CORALVILLE, Iowa, Jan 15 (Reuters) - One of the Federal Reserve’s most outspoken doves on Wednesday said he backs a continued wind-down of the Fed’s massive bond-buying program and could even see bigger cuts to the program if the economy strengthens.

Chicago Fed President Charles Evans’ support for a “measured” reduction of the Fed’s third round of quantitative easing, known as QE3, is not a surprise He voted for the cut to the Fed’s monthly bond purchases, to $75 billion from $85 billion, when the Fed policy-setting panel last met in December.

But Evans’ statement Wednesday that he could imagine speeding up the process, and the short shrift he gave to the possibility of pausing it, points to the likelihood the program’s days are numbered, even under incoming Fed Chair Janet Yellen. Yellen’s support for monetary policy that puts the fight against high unemployment at center stage marks her as a dove.

Outgoing Fed Chair Ben Bernanke in December said he expects the bond-buying to end by late 2014. In a transition that most observers see as lending continuity to Fed policy, Yellen will take the reins from Bernanke on Feb 1., just after the Fed’s upcoming policy meeting.

“I see it this way: you know we took a first step towards tapering in December, (and) it makes sense to continue that in January unless something occurs in terms of data development that’s really offbeat and unexpected,” Evans told reporters after a speech in which he emphasized the dangers of low inflation and the need for continued Fed stimulus.

“Successively through each meeting - I can sort of imagine 10 (billion dollars in cuts) - but if we get closer to the end, or if things are doing even better, I can see adjusting to somewhat more aggressive reductions,” he said.

While “logically” weaker data could trigger a pause in the wind-down process, he said, “I think now we’d like to get to a point, as it’s appropriate with economic data developments, to emphasize more strongly the forward guidance” on Fed interest-rate policy.

“The purchase rate is data dependent so logically that does include sort of pausing and not adjusting it downward at a particular meeting,” Evans told reporters. “But essentially the current strategy is to rebalance the mix of policy tools.”

The Fed has used an unprecedented array of policy tools to nurse the economy back to normalcy after the financial crisis, keeping short-term rates near zero since December 2008 and swelling its balance sheet to $4 trillion with purchases of assets designed to reduce long-term borrowing costs and spur hiring.

On Wednesday, Evans warned that the current level of 6.7 percent unemployment is still well above the “normal” unemployment rate of 5.25 percent.

While December’s decision acknowledges the improvement in the labor market - unemployment rose to 10 percent during the depths of the Great Recession - the move to taper bond purchases “does not, however, mean we thought the economy needed less overall policy accommodation.”

Instead, Evans said, the decision to reduce bond buying allows the Fed to focus more on its best-understood tool: telling markets what to expect in terms of interest-rate policy.

Specifically, the Fed said it would keep rates near zero until “well past the time” that unemployment falls to 6.5 percent, especially if inflation continues to linger below the Fed’s 2-percent target. Inflation, by the Fed’s preferred gauge, has risen just 1.1 percent in the past 12 months.

“This elaboration of our forward guidance should more strongly communicate that we are in no hurry to raise rates: We will not prematurely reduce accommodation in an economy with elevated unemployment and very low inflation pressures,” he said Wednesday.

“Importantly, in my mind, the low readings for inflation by themselves now suggest that it likely will be appropriate to keep the funds rate at its current level for quite some time.”

Growth is expected to rise to just 2.75 percent this year, in his view, and unemployment to fall to 6 percent or “a bit lower” by the end of 2015.

But inflation will rise only slowly, toward 1.5 percent by the end of 2015, he predicted.

“Very low inflation in an environment of rebounding growth and highly accommodative monetary policy continues to be both puzzling and worrisome,” Evans said.

Evans loses his rotating vote on the Fed’s policy-setting panel this year, but even as a non-voter he has been an influential participant at the policy-making table.

He was the author of the Fed’s so-called threshold policy, adopted in December 2012, a promise to keep rates low at least as long as unemployment is above 6.5 percent.

Now that unemployment has fallen close to that, he said Wednesday, the Fed needs to clearer about what economic indicators will be important in any decision to raise rates.

“Once we get below 6.5 percent or even at 6.5 percent, that number’s not going to mean anything any more, and it’s going to be all about describing the adjustment process after that,” Evans said. The Fed will still be buying bonds after the mid-point of 2014, he predicted.

“I can’t imagine that we would be adjusting interest rates until we finish that program and there’s been a little bit of time that’s past, depending on the economic circumstances,” he said.

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