Friday, April 5, 2013

Fed's Evans edges closer to fellow dove's rate-rise plan

By Jonathan Spicer

DAYTON, Ohio (Reuters) - A second Federal Reserve official has suggested that U.S. interest rates may have to remain near zero until the unemployment rate falls as low as 5.5 percent, lower than the 6.5 percent threshold the U.S. central bank has in mind.

Charles Evans, head of the Chicago Fed and an influential dove at the central bank, said on Thursday rates could stay at rock bottom until joblessness falls to 5.5 percent from the current lofty 7.7 percent, as long as inflation expectations remain lower than the Fed's 2-percent goal.

Arguably, that goes beyond the Fed's stated plan for rates, which have remained near zero since late 2008 to help drag the U.S. economy from recession. Under this plan, which Evans had a big hand in crafting, the Fed will keep rates ultra low until unemployment falls to 6.5 percent, as long as inflation expectations do not rise to 2.5 percent.

Evans's comments also appear to closer align him to Narayana Kocherlakota, president of the Minneapolis Fed, who has pitched a plan to lower the joblessness threshold to 5.5 percent. However, Evans stopped short of calling on the Fed to formally adjust its plan.

Getting to "6.5 percent could be a milepost along the way towards a much lower unemployment rate, perhaps as low as 5.5 percent as President Kocherlakota has mentioned," Evans, a voter on monetary policy this year, told reporters on the sidelines of the University of Dayton's RISE student investment forum.

If unemployment were to fall below 6.5 percent and annual inflation were still about 1.5 percent as it is now, Evans said, "I can't imagine why we would feel the need to start tightening policy, because we would be under-running our 2-percent goal."

This week, Kocherlakota again urged the Fed to lower its threshold for unemployment, arguing such a move would give the economy a bigger boost than the Fed's current promise.

Evans said he is "very sympathetic" to Kocherlakota's ideas, and has a "very complimentary" view of when rates should rise.

Still, Evans and Kocherlakota are on the extreme dovish end of the spectrum of the Fed's 19 policymakers.

There are hawks, for instance, who have expressed concerns about the interest-rate pledge the Fed made in December, arguing it could stoke inflation and asset bubbles.

Atlanta Fed President Dennis Lockhart, a centrist who appeared at the same forum here, said he does not see interest rates rising until 2015.

The Fed's official forecast is for 1.7 to 2.0 percent inflation by the end of 2015, with unemployment dropping to between 6.0 to 6.5 percent, at or below its rates threshold.

Besides the rates pledges, the Fed is buying $85 billion in Treasuries and mortgage-backed securities each month to push down long-term interest rates and encourage investing and hiring, and has vowed to continue the program until there is substantial improvement in the labor market outlook.

The U.S. unemployment rate is expected to remain at 7.7 percent when the March jobs report is released on Friday.


Turning to the Bank of Japan's aggressive move on Thursday to boost the Japanese economy after two decades of stagflation, both Lockhart and Evans expressed that a stronger Japan would benefit economies globally.

"Having Japan over the last many years going in and out of deflationary periods and being poised on the knife's edge of deflation and reflation, versus growth, is not a healthy element of the global scene," Lockhart said.

"So their preparedness to take more aggressive action, if it works, will certainly help everyone," he said. "How it will work or how effective it will be, it's too early to say."

Central bankers globally on Thursday were digesting details of the BoJ's monetary stimulus plan, which in scope is unmatched by even the Fed's unprecedented actions to spur post-recession economic growth in the United States.

The BoJ promised to inject some $1.4 trillion into Japan's economy in less than two years, a radical gamble meant to boost growth and lift inflation expectations.

Evans called the BoJ's plan "pretty aggressive." "I certainly hope that every foreign central bank around the world is able to adopt policies that ultimately lead to the most vibrant economies that those economies can have because we need it around the world," Evans said.

Dallas Federal Reserve President Richard Fisher, a critic of the Fed's own stimulus program, said the BoJ's stimulus should not pressure the U.S. central bank to press on with its own asset-buying program.

"It's not my or anybody else's role to approve or disapprove," Fisher said on Bloomberg TV.

(Additional reporting by Steven C. Johnson in New York; Editing by Chizu Nomiyama)


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