Federal Reserve Bank of Chicago President Charles Evans proposed further monetary action on the part of the Federal Reserve, including purchasing more Treasury bonds to cut the cost of borrowing, while lowering his forecast for U.S. economic growth, the Wall Street Journal reported. Meanwhile, Nobel Prize winning economist Joseph Stiglitz warned against such a policy, saying that monetary action would wreak havoc on foreign-exchange markets, according to Reuters.
Evans said the economy would grow by as much as 2.5% this year and by as much as 3.5% in 2011, while the job market won't show substantial improvement and inflation will remain low, necessitating monetary action, the Journal said, citing an interview with Evans.
"If we were to do more large scale asset purchases, namely Treasurys, that would have a beneficial effect," Evans told the Journal. "But given the nature of the outlook, much more accommodation than that is probably what's called for."
Evans echoed the sentiments of Federal Reserve Bank of New York President William Dudley, who said last week that further monetary action may be warranted because of high unemployment rates and low inflation. He estimated that $500 billion of mortgage-debt or Treasury purchases would have the same effect on the economy as cutting the Federal Reserve benchmark interest rate by as much as 0.75%, Bloomberg News reported, citing a speech Dudley made last week at a Society of American Business Editors and Writers conference New York.
Still, some economists warned against such policy. Stiglitz, speaking to reporters after a conference at Columbia University in New York, said aggressive monetary policy on the part of the Fed would have a chaotic effect on the world's exchange rates, Reuters reported today.
"The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said, according to Reuters. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world."