(Bloomberg News) Federal Reserve Bank of Chicago President Charles Evans said policy makers must not be passive in the face of high U.S. unemployment, firing back at critics of the Fed's decision this month to step up record stimulus.
"We cannot be complacent and assume that the economy is not being damaged if no action is taken," Evans said today in a speech in Hammond, Indiana. "If we continue to take only modest, cautious, safe policy actions, we risk suffering a lost decade similar to that which Japan experienced in the 1990s."
The policy-setting Federal Open Market Committee started a third round of quantitative easing this month, saying it would buy $40 billion in mortgage bonds a month until the labor market improves. The decision drew criticism from some Fed officials, including Philadelphia Fed President Charles Plosser, who said the new accommodation will do little to spur job growth while stoking inflation.
"It is essential to do as much as we can now to bolster the resiliency and vibrancy of the economy," Evans said to the Lakeshore Chamber of Commerce, repeating his call for additional easing. He doesn't vote on policy this year.
Evans has been among the most vocal proponents within the central bank for additional monetary stimulus. Reiterating a proposal, he urged policy makers to hold interest rates near zero until the unemployment rate falls to 7 percent or inflation rises to 3 percent.
The Fed can further expand its balance sheet if progress toward reducing unemployment falters, Evans said. The FOMC currently anticipates keeping interest rates low through at least mid-2015.
Economic Risks
Speaking to reporters after the speech, Evans said the economy would need 200,000 to 250,000 job gains per month for "several, several months" before the Fed can revisit its accommodative policy. Inflation risks are "well-managed" and it will take until the end of 2014 for the unemployment rate to decline to 7 percent, he said.
Slowing growth abroad, Europe's debt crisis and the so- called fiscal cliff -- in which $600 billion of tax increases and spending cuts take effect at the beginning of next year unless Congress acts -- have increased risks to the economic outlook, Evans said.
"Piling these risk events on a weak economy could throw us back into recession," he said. "Underestimating the enormity of our problems and the negative forces holding back growth itself exposed the economy to other potentially more serious unintended consequences."
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