Fed official supports aggressive monetary action
The Federal Reserve should be more aggressive than it currently is to aid economic growth by possibly buying up more mortgage-backed securities, which the markets interpret as quantitative easing or QE 3, said a top US central banker on Monday.
Participating at the Sasin Bangkok Forum in Thailand, Federal Reserve Bank of Chicago President Charles Evans expressed his concern over the weak US growth prospects, low inflation and persistently high unemployment.
The situation warrants further monetary easing to boost growth. Evans insisted that, "I support using our balance sheet to provide additional accommodation."
After the 2008 crisis, the US Federal Reserve has mounted on a series of bold monetary policy to prop up the US economy and the financial system through its bond-buying programme. This scheme, called QE, has sharply expanded its balance sheet from less than US$1 trillion to US$2.9 trillion.
Evans also serves in the monetary-policy-setting Federal Open Market Committee.
The policy maker said in prepared remarks for delivery before the Sasin Bangkok Forum in Thailand that he supported the Fed's recent decision to carry forward with a bond-buying program aimed at extending the overall maturity of the central bank balance sheet.
Merrill Lynch earlier noted that it expected the Fed to undertake QE 3, amid the deflationary trend, within the third quarter of this year. In June the Federal Reserve hinted at a possibility of more aggressive monetary stance to lift the US economy, which is battling with high unemployment.
Evans said he subscribes to a similar economic thinking of Professor Paul Krugman, the Noble prize winner in economics, who had advocated massive liquidity injection to boost growth.
Evan said more could be done although the final decision rests on Ben Bernanke, the Fed chairman, and the collective decision of the Federal Reserve Board in Washington DC.
"I would have preferred an even stronger step, such as the purchase of more mortgage-backed securities," Evans said.
Evans's comments followed the release of disappointing jobs data Friday. He said the mandate of the Fed is to ensure full employment and price stability.
He said inflation is likely to stay at 2 per cent for a period to come and it would not pose any threat if it stays within 3 per cent range.
Evans also said monetary accommodation should be aggressive enough to bring unemployment below 7 per cent.
The US Bureau of Labor Statistics reported last week that the number of unemployed persons at 12.7 million was essentially unchanged in June, and the unemployment rate held at 8.2 percent.
"We will face unemployment well above sustainable levels for some time to come," he said. Meanwhile, "I don't foresee much risk that inflation will rise above reasonable tolerance levels," especially as wage-generated price pressures are "practically nonexistent."
Overseas forces could easily wound the US, Evans warned. "The developments in Europe pose a significant downside risk to the US economy and world economic growth more broadly," and they are mostly likely to strike through financial channels, should the current troubles get worse.
