Federal Reserve Bank of Chicago President Charles Evans said he would back a more explicit pledge by the central bank to keep interest rates low if the third quarter proves to be weak, and doesn't rule out the possibility that near-zero rates will rise after mid-2012.
"It's obvious the third quarter has to show improvement and it ought to show a high likelihood of sustained improvement," Evans, 53, said today in a meeting with reporters at the bank. "If we continue to have weakness in the third quarter, it's going to be harder to plausibly sustain this idea, 'The next six months is going to get better.' We've been saying that for quite some time."
The regional bank president buttressed his support for keeping the Fed's current accommodative policies in place to spur growth and reduce an unemployment rate stuck around 9 percent or higher for more than two years. The Fed faces "somewhat less attractive options" than it has in the past and another round of government bond purchases may not be as effective as before, said Evans, who added he'd support such an action if "circumstances called for that."
Traders in Fed funds futures are placing odds of 23 percent or more that the benchmark U.S. interest rate, which has been near zero since December 2008, will rise to 0.5 percent between July and October of next year. The prospect of an increase around that time "doesn't strike me as silly," said Evans, who has led the Chicago Fed since September 2007 and votes on the committee this year.
Policy Accommodation
"The reasons to withdraw policy accommodation seem to me weak at the moment," said the bank chief, who is one of only two regional Fed presidents who vote every other year, along with Cleveland Fed President Sandra Pianalto. "So I would not be surprised if that doesn't change until an event late in 2012."
The Standard & Poor's 500 Index advanced 1 percent to 1,339.09 at 11:47 a.m. in New York, after Evans's comments were released. The yield on the benchmark 10-year Treasury note, which moves inversely to price, rose to 2.99 percent from 2.93 percent late yesterday.
Further Stimulus
Members of the Federal Open Market Committee are grappling with whether further stimulus is needed to boost an economy that grew just 1.9 percent in the first quarter and added 18,000 payroll jobs in June. Evans' views contrast with those made by colleagues including Dallas Fed President Richard W. Fisher, who said last week that the Fed has done enough.
Fed Chairman Ben S. Bernanke told Congress last week that the central bank is prepared to take additional steps, including buying more government bonds, if the economy appears to be at risk of stalling. Even so, he said policy makers aren't yet ready to embark on a third round of asset purchases.
Data released in the past week show confidence among U.S. consumers unexpectedly fell this month to the lowest level in more than two years, while retail sales stagnated in June. The index of U.S. leading economic indicators also rose at a slower pace last month, the New York-based Conference Board said today. In addition, more Americans than forecast filed claims for unemployment benefits last week, Labor Department figures showed.
Forecasts Lowered
Fed officials, at their most recent meeting in June, lowered their forecasts for growth and employment this year and next, while saying inflation excluding food and energy will be somewhat higher than previously forecast.
A few policy makers indicated the committee might have to consider new steps if growth remains too slow to "meaningfully" reduce the unemployment rate, minutes of the June 21-22 meeting show. Others said rising inflation risks might require the group "to begin removing policy accommodation sooner than currently anticipated."
The Fed could elaborate on its pledge to keep the overnight lending rate between banks in the range of zero and 0.25 percent for "an extended period," by mentioning a specific date that would be contingent upon future conditions, Evans said. Officials could also describe "alternative objective measures" in their statement that would signal when they'd be ready to alter policy, he said.
Growth Forecast
Evans has cut his growth forecast since January, from 4 percent to a range of 3 percent to 3.25 percent for this year and 3.5 percent to 3.75 percent in 2012. He described inflationary pressures as likely to remain "modest" over the medium term.
Economic growth rates close to his anticipated estimates are "not going to lead to substantial" improvements in the unemployment rate, Evans said. "We need something substantially north of 2.5 percent in order to bring the unemployment rate down. So 3.5 percent is good, but it's not a big number. Four to 5 percent is something that would have a more substantial effect on the labor market."
"It's entirely likely those forecasts will be marked down" even further, the regional chief said.
Evans also said that if the federal debt ceiling isn't raised, "it's hard to imagine that that won't lead to an increase in interest rates at some general level," undermining the Fed's efforts.
The U.S. has recovered only 1.8 million of the more than 8.7 million jobs lost since January 2008, according to Labor Department figures, as companies such as State Street Corp. and Cisco Systems Inc. still shed workers. The unemployment rate rose to 9.2 percent in June, the highest this year, from 9.1 percent in May.
Evans has been among the FOMC's strongest supporters of monetary stimulus since last year. He represents a five-state region that includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin. Iowa has one of the lowest unemployment rates, at 6 percent as of May, while Michigan has one of the highest, at 10.3 percent.
