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Fed's Evans sees economy achieving "escape velocity" by 2014

Chicago Federal Reserve Bank President Charles Evans speaks during the Sasin Bangkok Forum July 9, 2012. REUTERS/Sukree Sukplang
Chicago Federal Reserve Bank President Charles Evans speaks during the Sasin Bangkok Forum July 9, 2012. REUTERS/Sukree Sukplang

By Ann Saphir

DES MOINES, Iowa (Reuters) - The U.S. economy should emerge from the doldrums next year if the Federal Reserve sticks to its super-easy monetary policies, a top Fed official said on Thursday, even as he warned that cutting back too early would be a "big mistake."

The Fed is buying $45 billion in Treasuries and $40 billion in mortgage bonds per month, its third round of "quantitative easing," and has said it will continue the purchases until it sees substantial improvement in the labor market outlook.

"I don't think we are anywhere near the end of the program," Chicago Federal Reserve Bank President Charles Evans told reporters after speaking to the CFA Society of Iowa here.

In fact it will likely take until at least the end of the year before the jobs outlook improves enough for the Fed to stop its bond purchases, Evans said, and it will likely be mid-2015 before unemployment drops enough to allow the Fed to begin to think about a rate increase from current near-zero levels.

"I am optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014," he said, even as he acknowledged the downside threats to the economy from U.S. fiscal consolidation and economic troubles overseas.

"But we need to be careful not to undermine our own policies and remove accommodation prematurely, as the Japanese did," he said. If the Fed were to raise rates too soon, he told reporters after the speech, "what would happen is the economy would slow and we'd find ourselves in another tailspin."

Evans has been a key player in shaping the Fed's ultra-easy policy stance, and was the first to champion the idea of tying Fed policy to specific levels of unemployment and inflation.

In December, the Fed adopted his plan, saying it would keep interest rates near zero until the unemployment rate drops to at least 6.5 percent, as long as the inflation outlook does not top 2.5 percent. Unemployment is currently at 7.9 percent.

'WAY PREMATURE'

Most Fed officials, including Fed Chairman Ben Bernanke, want to continue their extraordinarily easy policies given the high jobless rate and inflation below their 2 percent target, and they do not want to derail a recovery that has faltered in each of the last three years.

But minutes of that meeting released last week suggested a growing number of officials had concerns about the risks and costs of the central bank's policy, and a number of policy hawks including Dallas Fed President Richard Fisher have called for tapering off the Fed's bond purchases soon.

"It's premature to talk about tapering" the asset-purchase program, Evans said on Thursday, adding that by "tapering" some Fed officials actually mean "ending" the purchases. "I think it's way premature."

On Thursday, Evans brushed off warnings from his more hawkish colleagues of "froth" in financial markets due to easy-money policies, and called high inflation a very unlikely outcome because wage pressures are all but absent.

Instead, Evans focused on the benefits of current Fed policy, saying he sees evidence they are working in the rise in the stock market, easier credit conditions and an increase in housing and car sales.

And he repeated his view that the Fed should continue purchasing bonds until the economy creates 200,000 new jobs a month for six months.

Evans forecast the U.S. economy would grow at about 2.5 percent to 3 percent this year, speeding up to between 3.5 percent and 4 percent next year. Those expectations put Evans at the top end of the latest official Fed forecasts for the economy, released in December.

EMPLOYMENT GROWTH

Unemployment will likely fall close to, or a little below, 7 percent by the end of next year and 6.5 percent by mid-2015, Evans said. If the economy grows faster than he expects, the unemployment rate could reach the 6.5 percent threshold sooner, setting the stage for a rise in interest rates, Evans said.

But a rate rise at that point is not locked in, he said. The Fed may still decide to keep rates low even after that if inflation is still uncomfortably low.

The central bank should begin to remove accommodation before unemployment falls to a more normal 5.5 percent level, he added.

Evans warned against "complacency," saying the economy still faces downside risks and urging the central bank not to withdraw its easy policies too soon, especially given the estimated 1 percent drag on the economy expected from U.S. fiscal tightening this year, not counting the sweeping budget cuts known as sequestration scheduled to go into effect on Friday.

"I am concerned about the risk that Washington might jam the recovery at the line of scrimmage by piling some more unhelpful near-term fiscal restraint on top of this already sizable effect," Evans added.

Japan's central bank failed to be aggressive enough, he suggested, miring that country in slow growth and deflation that serves as a warning for U.S. monetary policy.

"It is in fact that specter of repeating the Japanese experience that now keeps me up at night," Evans said.

(Reporting by Ann Saphir; editing by Todd Eastham)

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