The Federal Reserve will likely move to keep monthly bond buys at its current $85 billion pace into the new year, even after a program accounting for about half of that expires at the end of 2012, Chicago Fed President Charles Evans said on Tuesday.
The U.S. central bank last week said it plans to buy $40 billion every month in mortgage-backed securities to boost the economy. The purchases come on top of an existing stimulus program in which the Fed buys about $45 billion a month in long-term Treasuries even as it sells a like amount of short-term Treasuries.
That program, dubbed Operation Twist, runs through the end of 2012.
The Fed last week said it would continue to buy bonds under its new program, known as QE3 because it is the Fed's third bout of so-called quantitative easing, until the labor market improves substantially.
"I would be surprised if we would see enough evidence of that by the end of this year," Evans told reporters after a speech here. "Under those conditions, I would expect we would continue with something like an $85 billion base of purchases....that's a benchmark to start from."
Evans, who is not a voting member of the Fed's policy-setting panel this year, said decisions would of course be up to the central bank's Federal Open Market Committee, and there would be a "robust" discussion of what constitutes enough labor market improvement to merit tapering asset purchases.
Fed policymakers broadly agree that unemployment, at 8.1 percent, is much too high; most agree also that inflation, which has hovered near the Fed's 2 percent target, is well under control.
But there continue to be deep rifts within the central bank over the best policy response.
Dallas Fed President Richard Fisher, a forceful opponent of further easing, said he would have dissented last week if he had a vote on the FOMC this year.
"I would argue that it is less impactful right now because you have other things inhibiting businesses from making decisions on capex and employment," Fisher told CNBC. "I don't think this program will have much efficacy."
Fisher has long said that uncertainty over tax policy and regulation are keeping firms on hold, inhibiting hiring and dampening growth.
Alluding to the looming "fiscal cliff", the $500 billion or so in expiring tax cuts and government spending reductions scheduled to take hold at the start of next year, Fisher said monetary policy alone could not solve the economy's ills.
"We do our level best to get it right. We cannot do it alone and if it gets to the point where we are expected to do it alone ... we get into a very difficult spot from which we cannot exit," he said.
"So it's up to your views and everybody else, they own the Congress, they vote for them. Get your act together, Congress."
Near zero
The Fed has kept interest rates near zero since December 2008, promised to leave them there for years to come, and undertaken two rounds of bond purchases totaling $2.3 trillion.
Last week it went further, announcing in addition to its open-ended bond-buying program that it will likely keep rates low through mid-2015, well beyond the point where the economy could be expected to strengthen.
It was a formulation of policy that came very close to one Evans has embraced for the past year: vow to keep rates low until unemployment drops below 7 percent or inflation threatens to top 3 percent, and buy bonds if progress on jobs is not fast enough.
"I am optimistic that we can achieve better outcomes through more monetary policy accommodation," Evans told a group of local business people on Tuesday at a country club breakfast sponsored by the Bank of Ann Arbor. "This is the time to act."
If the labor market improves as he expects, asset purchases could begin to taper in 2014, before the unemployment rate - now at 8.1 percent - falls to what he forecasts to be a level just above 7 percent by the end of that year, he told reporters afterwards.
A tireless advocate of further easing for the past few years, Evans nodded to the Fed policy panel's overwhelming support for QE3 -- the vote was 11-1, with just Richmond Fed President Jeffrey Lacker dissenting.
"It seems like I am a little less outside of the consensus than I was earlier," he told the group.
The U.S. central bank could do still more, Evans told the group, including sharpening its guidance on rates, or simply buying more assets.
QE3 also has built-in safeguards, he said, including the option to stop if inflation rises too far above the Fed's goal, or if it proves to be ineffective.
Evans cast the debate over monetary policy as one between optimists who believe further easing can deliver a stronger economy, and pessimists who say it will only spark inflation. Pessimists have warned for years about higher inflation, only to have their predictions fall short, he said.
Risks to the U.S. economy are rife: a potential global slowdown, the risk of spillover from Europe's sovereign debt crisis and the looming raft of tax increases and spending cuts set to kick in at the end of the year unless Congress acts. All could send the economy back into recession, he said.
"We cannot be complacent and assume that the economy is not being damaged if no action is taken," Evans said.
