By Steven K. Beckner
(MaceNews) – Chicago Federal Reserve Bank President Charles Evans said Wednesday evening that he and his colleagues will be putting much more emphasis on “contemporaneous data” than on economic projections in deciding when to start reducing the pace of Fed asset purchases.
Evans, a 2021 voting member of the Fed’s policy-making Federal Open Market Committee, said that deciding when enough progress has been made to “taper” bond buying will be a matter of making judgments based on incoming data and having “conversations” about whether “substantial further progress” has been made toward the fed’s employment and inflation goals.
“We haven’t even started that conversation,” he told reporters following a speech to the Oakland University Economics Advisory Board.
Earlier, in prepared remarks, Evans suggested that the data are going to be particularly hard to read in coming months, noting various crosscurrents in the economy. He pointed to a combination of high unemployment and excess capacity in some industries and supply constraints in others.
Evans said he “doesn’t fear” that inflation could go up too much in the Fed’s effort to overshoot its 2% inflation target so as to average 2% inflation over time, and he said he doesn’t perceive that financial markets fear it either.
He spoke supportively of the administration’s proposed $1.9 trillion fiscal stimulus package, saying it would help the Fed reach its objectives sooner and saying he does not see additional deficit spending, combined with the Fed’s easy monetary stance, causing “overheating.”
Evans joined his colleagues on Jan. 27 when the FOMC left the federal funds rate in a zero to 25 basis point target range and again said it “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
The FOMC also reaffirmed plans to continue buying $120 billion of bonds per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
Evans gave no indication he is prepared to support a reduction in asset purchases in the near future, although he allowed for a scenario in which the economy proves very strong as the pandemic is brought under control and inflation expectations move up.
He suggested he and his fellow policy-makers will need to see a lot more data before they can seriously consider tapering asset purchases, much less raising the funds rate.
Data, not projections, will be the key, he stressed, asserting, “I don’t have any interest in adjusting policy on the basis of an inflation forecast until I actually see inflation go up.”
Deciding when to start tapering is “going to come down to how the Committee basically determines that the data on the economy are rolling in and whether they are consistent with ‘substantial further progress.”
He said the FOMC needn’t wait until inflation actually hits or exceeds 2%, because he said that may not occur until 2025, but he said he and his colleagues need to be convinced it’s headed in that direction and that the labor market is well on its way to achieving the Fed’s full and “inclusive” goal.
When the Fed was setting triggers for when to taper QE3, he recalled, the FOMC was seeking “substantial further improvement in the labor market,” but now it is also aiming at higher inflation.
“It’s a pretty high burden,” he said, and he suggested it will require more “conversation” among FOMC members – a conversation “we haven’t started.”
Evans said there is a common determination among policy-makers “on making sure we get where we want to go.”
Evans stressed the importance of fiscal stimulus when responding to questions from webinar participants, saying, “monetary policy can’t do it alone. We need help.”
Asked if President Biden’s proposed $1.9 trillion fiscal stimulus package is too big, Evans said it could be but said “it will help the economy recover back to its potential much more quickly” and said that “if you have too small a program it will take longer.”
“Doing more is better than doing less,” he added.
Earlier, in prepared remarks, Evans was upbeat about the economic outlook, but was more pessimistic about inflation than about employment.
Hence, he emphasized the need for monetary policy to stay accommodative for “as long as it takes” to achieve both the Fed’s maximum employment and average 2% inflation goals.
“Overall economic activity has recovered far more than most analysts had expected in the middle of last year, and I am optimistic about the future,” he said. “With increased vaccinations and continued support from fiscal and monetary policies, we should make significant strides toward returning to normal levels of economic activity as we move through 2021.”
Evans forecast 5-6% real GDP growth this year, followed by more moderate growth in subsequent years, and predicted the unemployment rate fall to 3.5% by the end of 2023.
However, Evans said “it will be some time before inflation is back to where we want it to be—monetary policy still has a good deal of work to do here.”
While “reasonably confident that we will reach our maximum employment goal over the next three years,” Evans said he is “more concerned about the prospects for reaching our inflation mandate….”
“Inflation is far too low today,” he continued. “And we have a long way to go to reach the magnitude of overshooting that I see as necessary to satisfy our average inflation objective.”
With the core Price Index for Personal Consumption Expenditures (PCE) just 1.5% above a year ago in December, he predicted “underlying inflation won’t be back to our goal until the mid-2020s,” he said.
Evans does expect a pick-up of measured inflation in the spring because of “temporary constraints” and statistical comparisons to low inflation readings last Spring, but he said, “after these factors have run their course, I expect inflation will settle down and end the year in the range of 1-1/2 to 1-3/4 percent.”
He doubted whether inflation will run moderately above 2% until “sometime in the mid-2020s.”
Meanwhile, he stressed “it will be critical for monetary policy-makers to look through temporary price increases and not even think about thinking about adjusting policy until the economic criteria we have laid out have been realized.”
“So, I see us staying the course for a while,” he added.
Under the FOMC’s revised definition of maximum employment, Evans said “policymakers should not be concerned with what might look like very tight labor markets as long as accommodative monetary policy is not generating unwanted inflation risks.”
Evans was deliberately vague about the timing for scaling back asset purchases or increasing the federal funds rate. “(T)here is no fixed date attached to these changes in interest rates or asset
purchases—the timing will be dictated by the progress made toward our policy goals. Monetary policy will be accommodative as long as it takes to reach them …..”
As the Fed strives to push up inflation above its 2% target to compensate for past undershooting, Evans said “bolstering the inflation expectations of households, businesses, and financial market participants will be key to achieving our goals.”
Echoing many of his Fed colleagues, Evans cited the importance of fiscal policy in under-girding the recovery.
“The relative resiliency of the economy also owes a lot to fiscal policy, which provided substantial direct support to household income and included a variety of programs to aid distressed households and businesses…,” he said, adding that “growth will be boosted by the fiscal policy package enacted in December, potential additional fiscal support, and continued accommodative monetary policy.”
But he said one of the uncertainties facing the economy, in addition to the pandemic, is “the degree of additional fiscal support that may be coming.” He said he is assuming a package “about half the size” of the Biden administration’s proposed $1.9 trillion package.
Asked by a webinar participant whether he is concerned that expansion of the money supply risks excessive inflation, Evans made clear he is not. Given the Fed’s difficulty in even hitting its 2% target, he said, “I have a lot of difficulty getting started thinking about that question for now.” He said the Fed needs to overshoot its target and said even 3% inflation would be acceptable.