One on One with Charles Evans, President of the Federal Reserve Bank of Chicago
Wednesday, September 09, 2009
|
|
|
|
SUSIE GHARIB: The economy continues to improve in most parts of the country. That's the conclusion of the Federal Reserve's latest beige book survey and that's the view of a key Fed policy maker, Charles Evans, president of the Federal Reserve Bank of Chicago and a voting member of the Fed's interest rate setting committee. In an exclusive interview today, Evans told me his biggest worry is the labor market and that people concerned about losing their jobs won't spend money. My first question to Evans, is the recovery on track?
CHARLES EVANS, PRESIDENT, FEDERAL RESERVE BANK OF CHICAGO: Well, I think the economy is beginning to recover. I think that for the second half of this year, I'm looking for the economy to grow about 2 1/2 to 3 percent and I think it will do that over the next 18 months. I think that the contraction is pretty much behind us, so I'm looking for growth.
GHARIB: If, Mr. Evans, if the economy is improving, why are we hearing more and more forecasts calling for a double dip recession?
EVANS: Well, I think there are still a lot of uncertainties and as soon as you start thinking about which elements of the economy will be growing, you always starts scratching your head. I think that the consumer is very important for the recovery and obviously there are issues about how high the savings right might be. That would tend to restrain growth of the consumer a bit. Businesses have already cut back so much on discretionary expenditures and they've cut employment dramatically and so there continue to be concerns about when the hiring margin will begin to pick up.
GHARIB: But can there be real recovery without job growth to go with it?
EVANS: That's going to be the hard part. We're going to be seeing the unemployment rate continue to go up, I think, until the first quarter of next year. And it's not going to feel like a recovery because of that.
GHARIB: When do you see the economy getting to full employment? And by that I mean a jobless rates of around 5 percent.
EVANS: Unfortunately, I think that's a few years away. I would guess that at the end of 2010 the unemployment rate's going to be about 9 percent and in 2011, it's going to be uncomfortably high, probably in the 7's, so it's going to be beyond that time frame.
GHARIB: When you talk to consumers and businesses in your district, what are they telling you? How are they doing in terms of getting loans, getting jobs, making money?
EVANS: Consumers are worried about their job prospects and whether or not they'll continue to have a job and that's restraining consumption spending. I think the decline in net worth gives rise to a higher savings motive and so that restrains consumer spending. I think business are concerned about shoppers coming in on the retail side. I think that they are reasonably content with the size of their operations so, they're not going to be spending on capital equipment and expanding their activities. So that will restrain growth to some extent.
GHARIB: So can the economy count on consumers to be the agent of growth as it did in the past?
EVANS: I don't think it will be the same as it was in the past. I think in the last few years, we had stronger consumption growth in part because net worth was higher, equity prices were higher, health prices were higher. Now things have turned around so that the added stimulus to consumer spending, that's not there and in fact they're working against that.
GHARIB: So where is growth going to come from?
EVANS: At first it's going to come from an inventory adjustment. Businesses have been very careful in paring back their inventories. They didn't want to have to pay for products on the shelves that weren't going to be bought. They were very reticent. Now they need to add and restock. That's a normal part of an initial recovery. That will add to growth. That will add to production. I think the rest of the world is beginning to do better as well and so, we'll see some export growth. That will add strength as well.
GHARIB: Mr. Evans, you said today that the U.S. economy may be facing the great inflation 2.0. So how serious a danger is inflation?
EVANS: I don't think that inflation is a big problem at the moment or for the foreseeable future. My own view is that inflation expectations are pretty well anchored and we're going to see inflation in the 1.5 percent range, probably over the next year to two.
GHARIB: So what is the Federal Reserve going to do to make sure that inflation doesn't do damage to the economic recovery?
EVANS: We're going to be keeping our eye on inflation. We're going to be looking at inflation indicators and also expectations and if inflation pressures were to begin to rise prematurely before we think they will much later in the economic recovery, we would respond aggressively as needed.
GHARIB: So how much longer do you think that the Federal Reserve will stand by its zero interest rate policy?
EVANS: I think the markers for that will be when the recovery takes hold, when unemployment starts coming down, when it's firmly embedded in the outlook, when businesses are truly forward looking. They're forward looking at the moment, but they have recently been looking to make sure that they are viable. Then they'll be looking for growth and before looking consumers their savings will be to the point where they're more comfortable with their financial system. I think that that's most likely to be towards the end of 2010, 2011.
GHARIB: At that time, as the Federal Reserve begins to navigate away from zero interest rates, how will you know if you're moving too fast or too slow?
EVANS: I'm not sure we'll exactly know the answer to that. There are always a lot of uncertainties and looking back on the period from 2004 to 2006, I think that increase in interest rates was perhaps a little too measured, not at the beginning but towards the end. So I think we will be looking at that period and responding a bit more aggressively than we did at that time. I think we will have to make a very hard judgment about whether or not the recovery is firmly on hold and how much inflationary pressures might be rising above the point that's consistent with our price stability objective. And we will be having to look at everything.
GHARIB: Mr. Evans, thank you so much for your time, very interesting conversation.
EVANS: Thank you very much.
GHARIB: You can watch an extended version of our interview with Chicago Fed Bank President Charles Evans or read the entire transcript on our website on pbs.org.
