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Chicago Fed president says central bank can’t afford to be passive

Lake Forest  Wednesday  1/11/12    Federal Reserve Bank Chicago President Charles Evans speaks Wednesday morning's Rotary

Lake Forest Wednesday, 1/11/12 Federal Reserve Bank of Chicago President, Charles Evans speaks at Wednesday morning's Rotary breakfast held at the Lake Forest Club. | Brian O'Mahoney~for Sun-Times Media

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Updated: October 29, 2012 6:31AM

The Federal Reserve must take risks and shouldn’t be “passive,” Federal Reserve Bank of Chicago President Charles Evans said following a luncheon in Hammond on Wednesday.

Evans’ comments came a day after Federal Reserve Bank of Philadelphia President Charles Plosser said new bond buying announced by the Fed earlier this month probably won’t boost growth or hiring and may jeopardize the Central Bank’s credibility. His comments rattled the markets and drove the Dow Jones industrial average down more than 100 points Tuesday.

Evans responded to Plosser’s remarks and defended the Fed’s move to buy $40 billion in mortgage-backed securities every month.

“We risk suffering a lost decade similar to what Japan experienced in the 1990s,” if the Fed were to take only modest, cautious actions, he said. “Underestimating the enormity of our problems and the negative forces holding back growth itself exposes the economy to other potentially more serious unintended consequences. That type of passiveness is a gamble that is not worth taking in my opinion.”

“I have a different view point .... I think we know how to unwind our balance sheet to avoid the kind of credibility hits that various people have mentioned,” he said. “I think that being passive is not the right action. I think you have to take some risks. There’s a risk, but I think it’s a well-managed one.”

Evans delivered the keynote address at the Lakeshore Chamber of Commerce Expo luncheon in Hammond.

He told attendees “For more than two years, I have vigorously supported strongly accommodative monetary policy measures. ... I believe the combination of new asset purchases and enhanced forward guidance about future policy should provide an important added stimulus to economic activity and hiring.”

Talking to reporters after the luncheon, Evans said he thinks asset purchases should continue until there is evidence of substantial improvement in the economy, including payroll employment increases nationally of “at least 200,000 a month for several, several months, probably 250 (thousand) is what we really need, something like that that’s supported by growth above trend. ... and I’d like to see the unemployment rate substantially below 8 percent as one of the guideposts for how long these asset purchases would continue.”

He said he doesn’t expect the national unemployment rate to get down to about 7 percent until the end of 2014. The rate was 8.1 percent in August.

A slowing global economy and the European economic and debt crisis continuing to threaten the U.S. economic recovery. He also cited the risk of the so-called fiscal cliff the U.S. is approaching: the simultaneous expiration of the Bush tax cuts and the expiration of the payroll tax holiday, scheduled for Jan. 1, 2013, and pending cuts of $1 trillion over a 10-year period that will start if a budget deal isn’t reached in Congress to avoid them. Evans noted that the Congressional Budget Office has estimated that going over that cliff would shrink gross domestic product in 2013 by 2.25 percent and increase the unemployment rate by a percentage point.

The Fed’s actions have been designed to provide some insulation to those threats and increase the vibrancy of the economy, he told reporters, adding he agrees with Fed Chairman Ben Bernanke’s viewpoint “that monetary policy cannot be a panacea against all of the worst potential outcomes,” Evans said. “If we experience a truly negative shock, there’s only so much that monetary policy can do about that.”

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