Chicago Fed president defends central bank moves

WASHINGTON -- A Federal Reserveofficial who has advocated more aggressive moves on the part of thecentral bank to combat high unemployment says the U.S. cannot affordtimid efforts to support the economy.

CharlesEvans, president of the Federal Reserve Bank of Chicago, said Wednesdaythat he wholeheartedly supported the moves the Fed took earlier thismonth to buy $40 billion in mortgage-backed securities every month in aneffort to drive interest rates lower and stimulate economic growth.

Hiscomments in a speech to a business group in Hammond, Ind., were thelatest in what has become a verbal battle among Fed officials over thecourse of interest-rate policy. On Tuesday, Charles Plosser, presidentof the Fed's Philadelphia branch, expressed doubts that the Fed's lateststimulus efforts would work.

Plosser'scomments were viewed negatively by financial markets with the Dow Jonesindustrial average losing 101.37 points on Tuesday. Plosser argued thatthe new bond-buying effort was unlikely to boost economic growth andrisked harming the Fed's credibility as an inflation fighter.

Plosseris among a minority group of Fed officials who have argued that thecentral bank has done all it can to help the economy and going anyfurther in terms of pumping more money into the financial system throughbond purchases runs the risk of triggering higher inflation in thefuture.

In his remarks Wednesday, Evans tookissue with those who have warned that the Fed's efforts could haveunintended adverse consequences.

"Being timidand unduly passive can also lead to unintended consequences," Evanssaid. "If we continue to take only modest, cautious, safe policyactions, we risk suffering a lost decade similar to that which Japanexperienced in the 1990s."

Evans has arguedfor the past two years that the central bank needs to adopt an explicittarget for unemployment and pledge to provide economic stimulus untilunemployment dips below that threshold. Evans has suggested providingsupport until unemployment falls below 7% as long as the outlook forinflation remains below 3%.

The Fed in itsSept. 13 decision, taken on an 11-1 vote, decided to launch a thirdround of bond buying, a process known as quantitative easing. It said itwould keep purchasing bonds and would consider providing additionalsupport until the labor market showed substantial improvement.

TheFed also extended its time line for keeping short-term rates at recordlows until at least mid-2015 and also said it would keep rates atexceptionally low levels for a considerable time after the recoverybegins to strengthen.

Both Plosser and Evansparticipate in discussions of the Fed's policy setting panel but do nothave votes this year. John Williams, president of the San Francisco Fedand a voting member this year, said on Monday that he believed the Fed'sactions this month were essential and should help engineer bettergrowth.

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

Kocherlakota said that aslong as inflation remains low, the Fed should keep its short-terminterest rate target at exceptionally low levels until the unemploymentrate falls below 5.5%.

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


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