Charles Evans, a member of the U.S. Federal Reserve’s policy committee, said the central bank should boost its asset-purchase program next month to keep longer term interest rates low.
The Fed currently is buying such securities at a pace of $85-billion (U.S.) a month, split roughly evenly between Treasuries and assets backed by home loans. But in December, the Treasury purchases are set to expire, deflating the Fed’s stimulus efforts at a time when the unemployment rate exceeds the central bank’s target.
“We need to continue, in my opinion, at the same pace we started out with, which is $85-billion,” Mr. Evans, the president of the Fed’s regional branch in Chicago, told The Globe and Mail’s editorial board Tuesday. “We should just do outright Treasury purchases to maintain that.”
Mr. Evans’s position helps set the stage for the Federal Open Market Committee’s final gathering of 2013, scheduled for Dec. 11-12 in Washington. The top agenda item for that meeting will be deciding whether to maintain stimulus at current levels, or to ease up on the accelerator.
For Mr. Evans, who has developed a reputation as one of the Fed’s more aggressive policy makers, there is little reason for debate. The U.S. unemployment rate is at 7.8 per cent, well in excess of the Fed’s unofficial target, which is something closer to 5.5 per cent. The U.S. economy has yet to replace some four million jobs that were lost during the recession.
“I would anticipate we would make a decision to continue with this,” said Mr. Evans, who was in Toronto to speak at an event hosted by the C.D. Howe Institute.
The debate at the Fed’s next policy meeting will be specifically about what to do about the expiration of a program that Wall Street calls Operation Twist.
It works like this: the Fed sells shorter-term securities from its vast trove of bonds, and uses the proceeds to buy assets with maturities of six to 30 years. The strategy manipulates the supply of each type of asset, “twisting” the typical cost curve of bonds, making longer-term assets relatively dearer than they would be in normal circumstances.
As a bond’s price rises, its interest rate falls. But the Fed can only swap assets for so long, and officials also worry that they could harm short-term debt markets if they keep the twist going for too long. The Fed already extended the program earlier this year, setting a new end date of December.
Most market participants expect the Fed will let the program end, but it remains an open question whether officials will seek to replace the lost stimulus by expanding its purchases of Treasury debt. Doing so would be controversial because it would require creating yet more money, which is what the Fed does when it buys mortgage securities.
The strategy is known as quantitative easing. In September, the Fed said it would continue buying mortgage-backed securities, undertake additional purchases and deploy additional measures “as appropriate” until the outlook for the unemployment rate improves “substantially.”
For Mr. Evans, “substantially” means about six consecutive months of monthly job creation in excess of 200,000 – a mark the U.S. economy has met in only nine months since the recession ended in 2009. He said the Fed should maintain an aggressive quantitative easing policy for at least another six months, and for perhaps as long as a year.