Policy will remain accommodative even after the Fed ends quantitative easing, and short-term interest rates could remain near zero after the unemployment rate falls to the FOMC’s policy threshold, Evans said. The committee, drawing on an Evans proposal, has pledged to keep the federal funds rate near zero at least as long as unemployment exceeds 6.5% and the outlook for inflation is no more than 2.5%.
“I can easily envision certain circumstances in which the unemployment rate could go below 6% before we moved the funds rate up,” he said.
The FOMC will probably vote at its meeting this month to taper its unprecedented stimulus program, according to 65% of economists surveyed by Bloomberg Aug. 9-13. The first step may be to taper monthly purchases by $10 billion to a $75 billion pace, according to the median estimate in the survey of 48 economists. They said buying will probably end by mid-2014.
Reports since the July 30-31 meeting, in which the FOMC said downside risks to the economy had diminished, suggest the U.S. economy has continued to make gains. Manufacturing expanded in August at the fastest pace in more than two years, the Institute for Supply Management’s factory index showed this week.
Evans, 55, became president of the Chicago Fed in 2007 after serving as the bank’s director of research. The district bank chief was also an early backer of the current round of bond purchases, and he dissented twice in 2011 in favor of easier policy.