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Chicago Fed president defends central bank moves

Chicago Fed president defends central bank moves

September 27th, 2012 by MARTIN CRUTSINGER, AP Economics Writer in News

WASHINGTON (AP) - A Federal Reserve official who has advocated more aggressive moves on the part of the central bank to combat high unemployment says the country cannot afford timid efforts to support the economy.

Charles Evans, president of the Federal Reserve Bank of Chicago, said Wednesday that he wholeheartedly supported the moves the Fed took earlier this month to buy $40 billion in mortgage-backed securities every month in an effort to drive interest rates lower and stimulate economic growth.

His comments in a speech to a business group in Hammond, Ind., were the latest in what has become a verbal battle among Fed officials over the course of interest rate policy. On Tuesday, Charles Plosser, president of the Fed's Philadelphia branch, expressed doubts that the Fed's latest stimulus efforts would work.

Plosser's comments were viewed negatively by financial markets with the Dow Jones industrial average losing 101.37 points on Tuesday. Plosser argued that the new bond buying effort was unlikely to boost economic growth and risked harming the Fed's credibility as an inflation fighter.

Plosser is among a minority group of Fed officials who have argued that the central bank has done all it can to help the economy and going any further in terms of pumping more money into the financial system through bond purchases runs the risk of triggering higher inflation in the future.

In his remarks, Evans took issue with those who have warned that the Fed's efforts could have unintended adverse consequences.

"Being timid and unduly passive can also lead to unintended consequences," Evans said. "If we continue to take only modest, cautious, safe policy actions, we risk suffering a lost decade similar to that which Japan experienced in the 1990s."

Evans has argued for the past two years that the central bank needs to adopt an explicit target for unemployment and pledge to provide economic stimulus until unemployment dips below that threshold. Evans has suggested providing support until unemployment falls below 7 percent as long as the outlook for inflation remains below 3 percent.

The Fed in its Sept. 13 decision, taken on an 11-1 vote, decided to launch a third round of bond buying, a process known as quantitative easing. It said it would keep purchasing bonds and would consider providing additional support until the labor market showed substantial improvement.

The Fed also extended it timeline for keeping short-term rates at record lows until at least mid-2015 and also said it would keep rates at exceptionally low levels for a considerable time after the recovery begins to strengthen.

Both Plosser and Evans participate in discussions of the Fed's policy setting panel but do not have votes this year. John Williams, president of the San Francisco Fed and a voting member this year, said on Monday that he believed the Fed's actions this month were essential and should help engineer better growth.

Williams and Evans have been in the Fed camp urging more support. One of the biggest surprises in a recent string of speeches came last week when Narayana Kocherlakota, who had been in the anti-inflation camp along with Plosser, came out in support of stronger efforts.

Kocherlakota said that as long as inflation remains low, the Fed should keep its short-term interest rate target at exceptionally low levels until the unemployment rate falls below 5.5 percent.

The Fed's interest-rate committee next meets on Oct. 23-24 and most private economists say they are not expecting any major policy changes at that meeting, given what has already been done. However, they said the Fed may decide to announce more support for the economy at its last meeting of the year on Dec. 11-12.