Monday, October 1, 2012
Fed's Evans: QE III and Fed's Monetary Policy Easing Will Continue Until Unemployment Falls Below 7%
CNBC's Steve Liesman interviews Chicago Federal Reserve President Charlie Evans
October 1, 2012
let's get to our newsmaker of the morning. steve liesman joins us from chicago with a very exclusive interview. steve?
yes, thanks very much.
i'm here in chicago with the chicago federal reserve president charlie evans. nice to be here. a year ago you laid out this idea of pegging policy to unemployment, and to inflation, given what the federal reserve just did, do you feel vindicated and the follow-up to that is do you feel satisfied, is it enough?
well, last year i was here and i was talking a lot about our dual mandate responsibilities and i mentioned that with the unemployment rate at that time at 9% that was unacceptably high and we need to focus more on our dual mandate responsibilities. i feel good that our most recent statement and policy is focusing on strongly on the labor market, we're looking for substantial improvement in labor market conditions, the criteria for how long we're going to continue with very accommodative policies and that's a step in the right direction. a step in the right direction but is it enough?
you want the fed to do this for a particular reason, which was you felt it would make policy more effective. they haven't done exactly what you advocated which is to peg numbers to policies, so is it enough?
right to my own prescription has been that we become very explicit about our forward guidance and indicate the funds rate will remain low until at least the unemployment rate goes below 7%.
or if something goes wrong and inflation goes up to a higher tolerant range 3% maybe we should back off. i think that would be a clear guidance on top of our mid 2015 language.
what we're currently embarking upon with increasing our long duration assets on our balance sheet to the tune of $85 billion per month we're looking for substantial improvement in labor market conditions. for me, that seems like we ought to be seeing $200,000 increase in payroll employment per month, maybe a little higher than that for about six months really. we ought to see growth that is above trend which supports that continuing substantial improvement in labor market conditions. if we get those things to move at the same time, we'll see the unemployment rate go down. that would be movements towards having enough accommodation.
you have changed your growth forecast because of the fed's recent policy?
when we submit growth forecasts, we're supposed to do it under the assumption policy and i had been saying the last two years that policy ought to be far more accommodative than our actual actions should be. my most recent forecast has been for quite substantial improvements in the economy, premised on the idea that policy would be accommodative about like what we're seeing, i think we could do a little bit better by being explicit about our forward guidance, but so my forecast has unemployment coming down to the 7% range by the end of 2014 which is another reason why i think we should be accommodative. when do we get that above trend growth? during that period to get the unemployment rate continued to move down we would be seen above trend growth so we would be seeing growth next year, 2.5, 2.75 but after that above 3% substantially. as you might have imagine and read there's a lot of skepticism about the policy and how it's going to work.
can you explain how buying mortgages specifically will lead to lower unemployment?
well, to the extent that we make it more attractive and easier for people to refinance their mortgages it leaves that with more aftertax income to spend so if they need to save more, they can save more quickly. if they would like to spend and buy a durable good they put off buying for the last three years, buy a new car would increase demand. when you increase demand firms find their existing workforce isn't enough to meet demand. businesses are waiting for that demand to increase and they would begin to expand employment, more people come into the labor market they have higher income demand increases. if we could get things going a little bit more we have a lot of accommodation in place that can be more effective once mortgages are refinanced. interest rates were already so low. it seems like by the way that when it comes to home purchases, refinance something a different story but for home purchases there seems little sensitivity to the change of rates to actual home purchases.
why would even lower rates prompt people who essentially an american public trying to delever, why would they want to take more debt at lower rates?
financial conditions are not as accommodative as you're suggesting, they're pretty accommodating and every time we start talking about we might be concerned about inflation, we might have to increase the funds rate sooner than mid 2015, that imparts more restrict i haveness than is our intention with our policy. i think to the extent you get more people refinancing and having the opportunity to the extent that small business people find the environment more attractive to borrow. banks are looking for good quality creditor -- credits in order to make these loans to the extent we start to improve things, they'll be able to do that and things wil really start to burst forward i believe. in jeff lacquer's dissent he said further quantitative ease something unlikely to improve growth and likely to create inflation. i don't think we've seen inflationary concerns. our inflation outlook is for less than 2%. 2% is our long run observe jikt objective for inflation. i don't think we've done a good enough job describing ou attitudes. i don't see the inflationary pressures. the kind of concerns i hear from a lot of people are premised on the idea the natural rate of unemployment is substantially higher than what we really think about the current rate. if you believe that, you would believe inflation was going to take off and if you don't think inflation is going to take off now, instead well, i think this is going to depend on how things play out but eventually people will find inflation higher it's that inbetween period, i've never heard a good description of that describes how we get from our current period to higher inflation. i think the way we get to a point like that is you get the economy to grow, banks start lending and more money in circulation in a productive fashion. price pressures and interest rates would go up, that would be a healthy thing in terms of