January 3, 2009 / 10:30 PM / 9 years ago

Evans says Fed's moves should cushion downturn

SAN FRANCISCO (Reuters) - The Federal Reserve’s new lending programs should help cushion the impact of the year-old U.S. recession but a large traditional fiscal stimulus plan is also needed, a top Fed policy-maker said on Saturday.

“We expect large amounts of more traditional types of fiscal stimulus to increase aggregate demand. I believe a big stimulus is appropriate,” said Charles Evans, president of the Chicago Federal Reserve Bank.

A year into the recession, the U.S. jobless rate appears on pace to exceed 8 percent in 2009, Evans said in remarks to the American Social Sciences Association meeting in San Francisco, noting that many non-financial industries face the risk of “long-term structural impairment.”

In November, the jobless rate was 6.7 percent.

Without the Fed’s series of moves to help unfreeze credit markets and cut official interest rates to the bone, “the downturn -- and its costs to society -- would be even more severe than what we are currently facing,” said Evans, who is a voting member of the policy-setting Federal Open Market Committee in 2009.

Since the financial market crisis erupted, the Fed has created several new programs aimed at bypassing the traditional banking system and smashing through the credit-market logjam, including the direct purchase of mortgage-backed securities.

With the Fed holding down the monetary policy aspect of the equation, Evans said similarly aggressive actions are needed on the fiscal side to shore up the economy.

“Since most economic forecasters envision the current downturn as rivaling the deep recessions of 1974-75 and 1981-85, I think these fiscal programs must be large in order to be effective and to instill badly needed confidence,” he said.

President-elect Barack Obama has said that signing a major economic stimulus package will be his first priority when he takes office on January 20, with a goal of creating 3 million jobs over two years.

Evans said the Fed will be increasing its nontraditional policies further now that the federal funds rate, its traditional tool to influence economic growth, has been cut to almost zero, in a reference to the “quantitative easing” measures taken by the central bank recently.

“We are faced with the challenge of calibrating these unfamiliar policies and, in the future, determining the appropriate time and methods for winding them down,” he said.

Evans also said the market crisis that erupted in 2007 showed huge holes in financial regulation.

“Significant weaknesses have been revealed in our system of financial regulation. ... These failures call for a reassessment of the roles of market discipline and our regulatory structures,” he said

Many of the Fed’s moves have been done on the fly in response to “emerging distress,” and the central bank must do a better job communicating its motives to the public, Evans said.

“In a complex and dynamic environment, the public needs effective and transparent communications. As our lending facilities and other policy responses continue to evolve, this is a daunting task,” he said. “We should strive to do more.”

Editing by Leslie Adler

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