Tue, Jul 10, 2012 - Page 15 News List

US Fed urged to focus on employment rate

ALTERNATIVE POLICY:The Chicagao Fed president called for the Fed to keep interest rates low until unemployment falls below 7 percent or inflation rises above 3 percent

Bloomberg

Federal Reserve Bank of Chicago president Charles Evans said the US central bank should move more forcefully to lower the unemployment rate, warning of long-term economic damage should high joblessness persist.

“Failure to act aggressively now will lower the capacity of the economy for many years to come,” Evans said in the text of remarks yesterday in Bangkok. “I support using our balance sheet to provide additional accommodation.”

Recent reports have signaled the US recovery is weakening, with figures showing last week that employers added fewer workers to payrolls than economists forecast and the unemployment rate stayed at 8.2 percent.

Evans and Boston Fed President Eric Rosengren, who spoke earlier at the same conference in the Thai capital, indicated in their prepared remarks little optimism hiring will accelerate soon.

“I expect that we will face unemployment well above sustainable levels for some time to come,” Evans said.

US Federal Reserve policymakers consider a jobless rate of between 5.25 percent and 6 percent to be consistent with a fully employed labor market over the long term, he said.

Rosengren said employment growth had “slowed fairly -noticeably,” citing “significant excess capacity.”

The US central bank bought US$2.3 trillion of securities in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to last year to support the economy. Speaking to reporters after his speech, Rosengren called last month’s job figures “disappointing” and said a third round of easing, known as QE3, is possible, depending on economic data.

The Fed’s policy-setting Federal Open Market Committee (FOMC) last month expanded a program intended to lower longer-term borrowing costs, adding that it was prepared to act further to promote sustained employment gains.

“Our action in June that -continued our Maturity Extension Program was useful,” the Chicago Fed president said. “But I would have preferred an even stronger step, such as the purchase of more -mortgage-backed securities.”

Evans repeated his call for the US Federal Reserve to commit to low interest rates until the unemployment rate falls below 7 percent or inflation rises above 3 percent. He added that targeting the level of nominal income would be “an appropriate policy choice,” while adding that he recognizes the “difficult nature” of such an approach.

The FOMC expanded a program known as Operation Twist by US$267 billion through the end of the year at its June 19 and June 20 meeting, and officials lowered their forecasts for growth and employment.

US Federal Reserve Chairman Ben Bernanke said after the meeting that the Fed was ready do more if growth faltered, saying that additional asset purchases were among the steps it would consider.

Evans, who does not vote on policy this year, has been among the most vocal proponents within the Fed for additional monetary stimulus. He was the only member of the FOMC last year to dissent in favor of more accommodation.

In his prepared remarks, Rosengren said hiring in the US had recently slowed “fairly noticeably” and warned that consumer demand could weaken further in a “self- fulfilling dynamic.”

“The slowdown in employment growth not only hinders our ability to get to full employment, but also weakens the consumer side of the economy even more, going forward,” Rosengren said.

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