Ameet Sachdev, Chicago Tribune –
The president of the Federal Reserve Bank of Chicago gave a pessimistic outlook Wednesday for the U.S. economy, forecasting slower growth that does not bode well for reducing the nation’s high jobless rate.
Charles Evans said he expects the economy to grow 2 to 2.5 percent during the next two years, lower than the 2.5 to 3 percent range he projected in April. He slashed his forecast after reviewing recent economic data, including May’s meager addition of 69,000 jobs.
“The economy is growing, but we’re a lot closer to being put in a position where growth could stall,” Evans told a small group of reporters at the Chicago Fed headquarters. “Given all the risks we’re facing, that’s a very unfortunate place to be.”
Evans met with reporters a week after attending a meeting of the Federal Reserve’s policymaking committee. He has been one of the central bank’s most vocal advocates for the need for more economic stimulus to reduce the 8.2 percent unemployment rate.
Despite signs that the economy needs more help, Fed officials announced a modest change last week in monetary policy that is aimed at keeping long-term interest rates low.
Evans, who does not have a vote on the committee this year, sounded frustrated at the lack of more aggressive action, but he was careful not to openly criticize fellow policymakers.
“I’ve said for quite some time that I think we should be doing more accommodation than what was adopted,” Evans said. “I also have said that in the current environment, any amount of additional accommodation is welcome. I took comfort in that regard.”
The Fed has taken unprecedented steps to help the economy recover from a deep recession. It has kept short-term interest rates near zero since 2008 and pledged to keep them ultralow until late 2014. It has bought more than $2 trillion in Treasurys and mortgage-backed securities to lower long-term interest rates. More recently, it started a program, dubbed Operation Twist, to push down bond rates by trading short-term Treasurys in its portfolio for longer-term securities.
The Fed extended Operation Twist, which was set to expire Saturday, through the end of the year, hoping it will keep rates for everything from mortgages to car loans low and trigger more borrowing and spending.
Evans said keeping the program was acceptable but will likely reduce the yield on 10-year Treasurys only by a tenth of a percent. He reiterated that the Fed can and should be doing more because labor market conditions remain “completely unsatisfactory.”
His first preference is for the Fed to go beyond its pledge of keeping interest rates low until late 2014. He has said the Fed should tell the public it will keep rates low until unemployment falls to 7 percent or inflation moves past 3 percent. Inflation has remained in check during the recovery, at or near the Fed’s 2 percent objective.
Evans’ toleration for more inflation has attracted criticism, including from other central bankers. They counter that tying the Fed to specific economic indicators could take monetary policy off track. Arguments also have been made that there is little the Fed can do to help lower the unemployment rate because the shifts in the labor market are due to structural reasons, like a mismatch of skills, rather than cyclical changes.
Evans shot back at his critics, saying businesses and economists who complained about the shortage of skilled workers during the Great Depression in the 1930s were proved wrong.
“If you think the structural rate is 6 percent, 8.2 percent (unemployment) is real high,” said Evans, his voicing rising. “If by that concern someone means the structural rate of unemployment is 8 percent, I don’t see any evidence of that.”
Evans said the Fed’s actions to lower long-term interest rates have been muted because many homeowners have been unable to refinance their mortgages. Studies show that refinancing activity has been largely limited to those with good credit. He called on lawmakers and regulators to help unclog the refinancing market.
“If somebody could address that, that would have a beneficial effect on growth,” Evans said. “Then the current level of accommodation would become even more powerful than it is.”