Fed official ‘won’t rule out’ tapering in Sept.

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Fed official ‘won’t rule out’ tapering in Sept.

Federal Reserve Bank of Chicago President Charles Evans, who has been among the most vocal proponents of record monetary accommodation, said the Fed probably will have bought at least $1.2 trillion in bonds from January 2013 until the time he sees the program ending in mid-2014.

“We’ve seen good improvement in the labor market, there’s no question in my mind about that,” Evans said in Chicago. “I’m still wanting to see greater evidence that it’s a sustainable improvement” and “I would clearly not rule” out a decision to begin dialing back the purchases in September.

U.S. central bankers are scrutinizing incoming economic reports to determine if the labor market has substantially improved since last September, when they renewed an expansion of their balance sheet that’s now at $3.57 trillion.

The economy added the fewest jobs in four months in July, even as the unemployment rate fell to 7.4 percent, Labor Department figures showed Aug. 2.

That employment report “wasn’t bad” yet was “not great,” Evans, who votes on monetary policy this year, said in a meeting with reporters at the district bank. “We’re looking for continued labor improvement, payroll employment growth on the order of 175,000 to 200,000 per month.”

Evans, 55, said he backed the timetable that was laid out by Chairman Ben S. Bernanke on June 19, when Bernanke said the Federal Open Market Committee could start trimming its $85 billion in bond purchases later this year and may end it in the middle of 2014 if the economy improves along officials’ expectations.

The Fed may make that decision to taper at its Sept. 17-18 meetings, according to half the economists surveyed by Bloomberg on July 18-22.

The Chicago Fed chief has been among the most vocal backers of additional easing at the Fed in recent years. He was the first to propose the central bank pledge to keep rates low until pre-determined economic thresholds are met, a move intended to guide longer-term borrowing costs lower and support the economy.

In December, the FOMC adopted the proposal to keep rates near zero at least as long as unemployment is above 6.5 percent and inflation is no more than 2.5 percent. The plan became known in financial markets as the Evans Rule.

Minneapolis Fed President Narayana Kocherlakota has been urging his colleagues to adopt a lower unemployment threshold, to 5.5 percent. Evans said his thinking is “not largely inconsistent with President Kocherlakota’s proposal” because, if inflation remained low, he would support keeping rates near zero even after joblessness fell below 6.5 percent.

“Unemployment might get down to 6 before we see the need” to tighten, he said. “If the committee viewed it as additionally useful to adjust that threshold” down, “I would certainly pay attention to that. I don’t anticipate I would have a problem with that.”

While some commentators have speculated that the Fed may set a lower bound on inflation, “I don’t really appreciate how that helps in providing the appropriate amount of accommodation,” he said.

The personal consumption expenditure index, the Fed’s preferred gauge of inflation, rose 1.3 percent through June from a year earlier, the Commerce Department said Aug. 2, below the Fed’s 2 percent target.

The policy-making FOMC last week warned that persistently low inflation could damp the economic expansion and said it would keep buying $85 billion per month in bonds.

Bloomberg
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