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 The comments from Charles Evans, the president of the Federal
Reserve Bank of Chicago, suggest a strong report on November jobs
growth on Friday has brought the Fed closer to reducing its third
round of quantitative easing, known as QE3.
U.S. nonfarm payrolls expanded by a greater-than-expected 203,000
jobs in November, with the unemployment rate dropping to a five-year
low of 7 percent. <US/JOBS1>
"I'll be open-minded," Evans said in an interview with Reuters
Insider, when asked whether he would support trimming the Fed's
stimulus at its policy meeting on December 17-18.
"Everything else (being) equal, I would like to see a couple of
months of good numbers. But this was improvement."
The jobs data cheered Wall Street. The Standard & Poor's 500 Index
broke a five-day losing streak and ended Friday's session with a
gain of 1.12 percent gain. U.S. government bond prices were little
changed.
It also led economists to move forward their expectations for when
the Fed would begin to taper its purchases of $85 billion a month in
bonds. A Reuters poll of top bond dealers found that four of them
now expect the central bank to trim its purchases this month, and
five look for a move in January, while eight see them holding off
until March. <FED/R>
One of Evans' colleagues, Charles Plosser, the president of the
Federal Reserve Bank of Philadelphia, said the November jobs report
was more evidence that the U.S. central bank should end the
bond-buying program.
"The sooner we can end this thing, the better," said Plosser, a
longtime critic of the Fed's stimulus program.
The Fed's bond purchases are aimed at holding down long-term
borrowing costs to make it cheaper for businesses to invest and
workers to buy homes. After several years of slow, steady job growth
and growing concerns that the asset purchases might be fueling
bubbles in some corners of the economy, Fed officials are actively
debating winding them down.
While Plosser has opposed the latest bond-buying program from its
start in September 2012, Evans has been an outspoken advocate for
all of the U.S. central bank's efforts to nurse the economy back to
health following the 2007-09 recession.
Evans is a voting member on the policy-setting Federal Open Market
Committee this year. Plosser will become a voting member of the FOMC
in 2014.
LOWERING THE BAR
In the interview, Evans reiterated his view that the central bank
should provide more clarity about the future path of overnight
interest rates, which could help temper any adverse financial market
reaction when it starts tapering its bond purchases.
One way to do this, he said, would be for the Fed to promise not to
raise rates until the U.S. unemployment rate falls to 6 percent. The
Fed has pledged to keep rates near zero, where they have been since
late 2008, until the jobless rate hits 6.5 percent, as long as
inflation does not threaten to rise above 2.5 percent.
If policymakers lowered the threshold on the jobless rate at the
same time as they start to reduce bond purchases, he said, the
central bank would be "maintaining the same level of accommodation."
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Half of the bond dealers surveyed by Reuters on Friday thought the
Fed would reduce the unemployment threshold where the Fed would
first consider raising rates.
Evans also said that the Fed could use stronger language to describe
how long it expects to keep rates low, a tactic that he put to use
later in the day.
"I can't imagine" raising short-term rates even when unemployment
falls to 6.25 percent, he told reporters after a speech.
Earlier this year, when Fed Chairman Ben Bernanke signaled that the
central bank was thinking about winding down the bond buys,
investors pushed up borrowing costs so much that policymakers
worried this could undercut the still fragile recovery.
Startled officials have since stressed that reducing bond buying
does not mean that they plan to raise rates any time soon, and Evans
said markets were getting that message.
"The key thing is to provide a sufficient amount of confidence to
the public and the markets that we are going to continue to provide
as much accommodation as is necessary," he said.
Evans said lowering the jobless rate threshold could help convince
financial markets that the Fed is serious about keeping rates low
even after the bond buying stops.
LOOKING FOR THE EXIT
While Evans said he was encouraged about progress on the jobs front,
he added that he was "certainly nervous" about inflation that
continues to run well below the Fed's target of 2 percent.
In the year through October, the gauge of inflation targeted by the
Fed rose just 0.7 percent. Another reading that strips out food and
energy rose a little more quickly, gaining 1.1 percent. Evans said
this core reading was a better measure of the inflation outlook, but
it was troubling, nonetheless.
"We need to defend our inflation goal from below as well as from
above," Evans said.
He also lowered his forecast for growth next year to between 2.5
percent and 3 percent from an earlier projection of more than 3
percent.
Evans sees the Fed's third round of stimulus — known as QE3 — totaling about $1.5 trillion, a figure that suggests that the U.S.
central bank's bond buying will continue through next summer and
perhaps into the fall, depending on how rapidly the Fed cuts the
program once it begins to do so.
In remarks to reporters later Friday, Evans said he expects the Fed
to have completed its bond-buying program by the time the
unemployment rate falls to 6.5 percent. But he declined to say when
that might be.
(Additional
reporting by Jonathan Spicer in Philadelphia and Jason Lange in
Washington; editing by Jan Paschal)
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