Federal Reserve Bank of Chicago President Charles Evans said that policy makers must not be passive when it comes to the high unemployment rate in the United States. He fired back at the critics of the Fed’s decision to implement another round of stimulus action.
The Federal Open Market Committee began its third round of quantitative easing this month. It announced that it would buy $40 billion in mortgage bonds each month until the unemployment rate goes down.
The decision was criticized by some Fed officials. Philadelphia Fed President Charles Plosser said that the new round of quantitative easing will not spur job growth and would lead to inflation. Evans, who didn’t vote on the policy this year, called for more easing. He has been one of the vocal proponents within the Fed for additional stimulus. He wants policy makers to hold interest rates near zero until the unemployment rate drops to7 percent or inflation increases to 3 percent.
The Fed can expand its balance sheet if progress towards decreasing the unemployment rate fails. At present, the FOMC said that it would keep interest rates low until mid-2015.
Evans told reporters that the economy would need 200,000 to 250,000 job gains each month for several months before the Fed can review its policy. He added that inflation risks were well-managed and would take until the end of 2014 for the unemployment rate to drop to 7 percent.
There are many factors that affect the nation’s economy. These include the sluggish growth overseas, Europe’s debt crisis, and the fiscal cliff. The risk events on a weak economy could lead the nation into a recession.
Because of the protests in Spain, the S&P 500 dropped 0.4 percent. Evans added that banks were not lending enough to create more asset price bubbles. Minneapolis Fed President Narayana Kocherlakota endorsed a variation of Evan’s proposal last week. He wanted more explicit commitment that would help the economy improve.