Fed to Ease Until Jobless Rate Falls Below 7%: Evans

The Federal Reserve is doing everything it can to prop up an underperforming economy and will keep at it until the jobless rate falls below 7 percent, according to Chicago Fed President Charles Evans. The current rate is at 8.1% and it shows that the economy has yet to achieve sustainable growth.

By: Jeff Cox
Published: Monday, 1 Oct 2012
CNBC

The Federal Reserve is doing all it can to prop up an underperforming economy and will keep at it until the jobless rate falls below 7 percent, Chicago Fed President Charles Evans told CNBC.

Not only did Evans defend the central bank's recent announcement that it would embark on a third round of quantitative easing, but he also said he would have preferred if the Fed had been even more aggressive.

Evans said the Fed should keep policy loose until the unemployment rate falls below 7 percent. The current rate of 8.1 percent is too high and showing that the economy has yet to achieve sustainable growth, he said.

"That tells me that more accommodation would be appropriate, especially if it's effective," Evans said during a "Squawk Box" interview. "By all the analyses I've seen, it will be effective and the inflation risks are not very large at the moment."

After expanding its balance sheet to $2.8 trillion, the Fed said its QE3 program would entail buying another $40 billion a month in mortgage-backed securities, with the program piggybacking on the Operation Twist bond-buying.

All told, the Fed will be buying $85 billion a month in debt.

"There's scope for doing more. I would have been doing more for a longer period of time," Evans said. "The committee made the determination that we're a lot closer to something like unacceptable growth — stall speed — and it's time to do more."

Fed critics worry that the easing policies involve too much money creation and thus will cause inflation once those new dollars start to circulate through the economy.

The banks that have benefited from the infusion of new cash have largely used it to shore up their balance sheets rather than lend it out.

Evans believes that QE3, because it targets the housing market, will do a better job of fostering economic growth than simply buying Treasurys, which QE2 entailed.

"To the extent that we make it more attractive and easier for people to refinance their mortgages, that would leave them with more after-tax income to spend," he said. "If they need to save, they can save more quickly. If they would like to spend and buy durable goods they put off for the last three years, buy new cars, that would increase demand."

"I don't see any inflationary pressures," he said, adding that inflation actually would indicate that the economy was improving. As long it remains within the 2 percent or so that the Fed targets, Evans said he would welcome a little inflation and the opportunity for the Fed to consider raising its near-zero interest rate target.

"The way to get to a point like that is because the economy grows," Evans said. "Then you get more money in circulation in a productive fashion. Yes, it would be the case that price pressure and interest rates would go up. That would be a healthy thing in terms of the higher interest rates."

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