HAMMOND | Charles Evans, Federal Reserve Bank of Chicago president and CEO, said Wednesday the risk of only taking "modest" monetary policy actions could result in a decade of stagnant economic growth, similar to what Japan had in the 1990s.
In a speech to more than 300 people, Evans defended the Fed's announcement earlier this month to buy mortgage-backed securities for an indefinite amount of time and maintain near zero short-term interest rates through at least mid-2015. He said the action was needed to assist the labor market in its recovery from the Great Recession, as it continues to carry an unemployment rate of more than 8 percent.
"With the problems we face and the potential dangers lying ahead, it is essential to do as much as we can now to bolster the resiliency and vibrancy of the economy," Evans said.
Evans said asset purchases, also known as quantitative easing, should continue until sustained improvement in the labor market occurs, in the order of "several, several" months of U.S. payroll employment growth of at least 200,000 and economic growth above the current trend. He said it could take until the end of 2014 for the unemployment rate to get near 7 percent.
Evans said the Fed would increase its balance sheet higher than its current level of about $3 trillion, but the length of the buying window depends on inflation.
A couple of people at the meeting and a few Federal Reserve district presidents have questioned the Fed's ability to adequately manage inflation as a result of the purchases. However, Evans said risks can be appropriately managed, and he doesn't anticipate inflation rising higher than a 3 percent rate in medium term.
"We're going to be working through this for quite a long time," Evans said.
He also said the biggest risks to the U.S. economy's health are a slowdown in global economic activity, several European countries being in recession and the nation's "fiscal cliff." The fiscal cliff is a combination of expiring of tax breaks and automatic federal spending cuts taking effect Jan. 1, which the Congressional Budget Office estimated would reduce the budget deficit by about $600 billion but also would cause negative growth in gross domestic product next year.
Evans was the keynote speaker at the Lakeshore Chamber of Commerce's eighth annual business expo at Dynasty Banquets. He also visited with several local business leaders and public officials on a tour of Northwest Indiana Regional Development Authority-funded projects in Hammond and Whiting, the BP Whiting Refinery and ArcelorMittal Indiana Harbor.