BOSTON, Oct 16 (Reuters) - The U.S. Federal Reserve should do 'much more' to reduce unemployment and boost uncomfortably low inflation, including perhaps temporarily aiming for higher inflation to make up for a too-low level, a top Fed official said on Saturday.
'In my opinion, much more policy accommodation is appropriate today,' Chicago Federal Reserve Bank President Charles Evans said at a conference hosted by the Boston Fed.
With nearly one in ten in the labor force unable to find work and inflation threatening to drop further as households hoard cash, the U.S. central bank is widely expected to ease policy further at its next policy meeting on Nov. 2-3.
Most analysts believe the Fed will embark on a fresh round of Treasury purchases, over and above the $1.7 trillion in longer-term assets it has already bought.
Evans said the Fed, which cut short-term rates to near zero in December 2008, could also strengthen its commitment to keeping rates low.
He said the Fed should consider a policy of an explicit, ideal long-term path for inflation - say, 2 percent - and actively shoot for higher inflation for a few years to make up for periods of lower-than-optimal inflation such as the United States is experiencing, he said.
Evans said so-called price-level targeting could be a useful complement to the Fed's other strategies in an environment in which households and businesses are so cautious about the future that they save more than they invest, despite very easy monetary policy.
'The U.S. economy is best described as being in a bona fide liquidity trap,' he said. 'If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call.'
Evans, who rotates into a voting spot on the Fed's policy-setting panel next year and whose recent comments have been dovish on inflation, said clearly communicating an expected path for prices could help investors' understanding of the Fed's intentions.
The Fed has an informal inflation target of 1.7 to 2 percent. For the 12 months through August the core personal consumption expenditure price index -- the Fed's preferred inflation gauge -- was running at 1.4 percent.
To make up for that 'inflation deficit,' the Fed could target higher inflation - say, 2.2 percent in 2011 and 2.9 percent in 2012 - before bringing inflation back down to 2 percent, Evans said.
New York Fed President William Dudley, an influential member of the Fed's policy-setting panel, has also suggested the central bank consider price-level targeting, saying it could help the Fed achieve its goals more quickly.
But the strategy has drawn criticism from those who say it is too hard to communicate effectively, and could lead to runaway inflation down the road.
Evans said such fears may be overblown.
'My personal viewpoint is that it is horribly cynical to think that good communication is beyond our ability, especially if that is the best policy,' he said.
'An important risk would be the temptation to keep policy easy if the labor market has not reached the vicinity of full employment,' he said. But a disciplined exit plan, where the Fed removes its temporarily higher inflation target after the policy's goals are met and takes steps to bring it back down, would prevent such an event, he said.
(Reporting by Ann Saphir and Kristina Cooke; Editing by Padraic Cassidy) Keywords: USA FED/EVANS (ann.saphir@thomsonreuters.com; +1-312-408-8592; Reuters Messaging: ann.saphir.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
'In my opinion, much more policy accommodation is appropriate today,' Chicago Federal Reserve Bank President Charles Evans said at a conference hosted by the Boston Fed.
With nearly one in ten in the labor force unable to find work and inflation threatening to drop further as households hoard cash, the U.S. central bank is widely expected to ease policy further at its next policy meeting on Nov. 2-3.
Most analysts believe the Fed will embark on a fresh round of Treasury purchases, over and above the $1.7 trillion in longer-term assets it has already bought.
Evans said the Fed, which cut short-term rates to near zero in December 2008, could also strengthen its commitment to keeping rates low.
He said the Fed should consider a policy of an explicit, ideal long-term path for inflation - say, 2 percent - and actively shoot for higher inflation for a few years to make up for periods of lower-than-optimal inflation such as the United States is experiencing, he said.
Evans said so-called price-level targeting could be a useful complement to the Fed's other strategies in an environment in which households and businesses are so cautious about the future that they save more than they invest, despite very easy monetary policy.
'The U.S. economy is best described as being in a bona fide liquidity trap,' he said. 'If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call.'
Evans, who rotates into a voting spot on the Fed's policy-setting panel next year and whose recent comments have been dovish on inflation, said clearly communicating an expected path for prices could help investors' understanding of the Fed's intentions.
The Fed has an informal inflation target of 1.7 to 2 percent. For the 12 months through August the core personal consumption expenditure price index -- the Fed's preferred inflation gauge -- was running at 1.4 percent.
To make up for that 'inflation deficit,' the Fed could target higher inflation - say, 2.2 percent in 2011 and 2.9 percent in 2012 - before bringing inflation back down to 2 percent, Evans said.
New York Fed President William Dudley, an influential member of the Fed's policy-setting panel, has also suggested the central bank consider price-level targeting, saying it could help the Fed achieve its goals more quickly.
But the strategy has drawn criticism from those who say it is too hard to communicate effectively, and could lead to runaway inflation down the road.
Evans said such fears may be overblown.
'My personal viewpoint is that it is horribly cynical to think that good communication is beyond our ability, especially if that is the best policy,' he said.
'An important risk would be the temptation to keep policy easy if the labor market has not reached the vicinity of full employment,' he said. But a disciplined exit plan, where the Fed removes its temporarily higher inflation target after the policy's goals are met and takes steps to bring it back down, would prevent such an event, he said.
(Reporting by Ann Saphir and Kristina Cooke; Editing by Padraic Cassidy) Keywords: USA FED/EVANS (ann.saphir@thomsonreuters.com; +1-312-408-8592; Reuters Messaging: ann.saphir.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.