The US Federal Reserve should be in no hurry to tighten monetary policy despite better growth prospects, a leading Fed policymaker has told the Financial Times.
“While I’m very pleased at the improvements in the economy I think it’s going to continue to be a while before we’re safely past these conditions,” said Charles Evans, president of the Chicago Fed.
Mr Evans is a voting member of the rate-setting federal open market committee this year and his comments show the gap between some Fed officials and market expectations that rates may start to rise in the autumn.
Stronger data on growth and rising commodity prices have led markets to speculate that the Fed will quickly switch from quantitative easing – its second $600bn “QE2” round of asset purchases is due to end in June – to tightening policy again.
But Mr Evans, a supporter of QE2 who argued last autumn that the US was caught in a “liquidity trap”, said inflation was still very low and monetary policy should stay loose until the risks of the liquidity trap abated.
“The message that comes out of what I think of as high-quality research on this subject is that policy ought to remain accommodative for really quite a while, even a while after conditions start to improve,” he said.
Mr Evans said that he would look for robust growth in demand, led by consumer spending and business investment, and evidence of businesses hiring in order to scale up output as signals that it was time to tighten policy.
Mr Evans has forecast a relatively optimistic growth rate of about 4 per cent in 2011 and 2012 but he said that, with households continuing to pay down debt in the wake of the financial crisis, he saw little chance of a dramatic acceleration.
“The real question is: what is the likelihood of an outsized, extended increase in consumer spending? They continue to be less likely than you would hope for during a strong, vibrant, robust recovery,” Mr Evans said.
He therefore welcomed signs of a slight pick-up in inflation– the consumer price index excluding food and energy rose by 1 per cent on a year ago in January – but said that he would remain concerned until these “core” price rises reached 1.5 per cent.
Mr Evans defended the Fed’s use of core inflation measures, despite rapid rises in food and energy prices, saying that commodity prices had been volatile in the past and that businesses did not yet seem to be able to pass the rises on to consumers.
Commodity prices make up a small part of business costs compared with labour. Wages have not kept up with productivity growth recently so the real cost of employing staff in the US has been falling.
Mr Evans said that the lack of upward pressure on wages was evidence that much of the 9 per cent unemployment rate still reflected a lack of overall demand in the economy and not structural factors such as workers lacking the right skills.
“To my mind, as long as we don’t see underlying inflationary pressures rising, that indicates that structural unemployment is less,” he said.
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