Fed moves to soften recession?

THE Federal Reserve's innovative lending programs should cushion the impact of the current US recession but a large traditional fiscal stimulus plan is also needed, a top Fed policy-maker said on Saturday.

Without the Fed's moves, 'the downturn – and its costs to society – would be even more severe than what we are currently facing', said Mr Charles Evans, president of the Chicago Fed.

'They hold open the promise of mitigating the losses in jobs and output.'

In comments prepared for a panel at the American Social Sciences Association meeting in San Francisco, Evans said similarly aggressive actions are needed on the fiscal side to shore up the economy.

'I believe a big stimulus is appropriate,' he said.

A year into the recession, the US jobless rate appears on pace to exceed 8 per cent in 2009 and many non-financial industries face the risk of 'long-term structural impairment', Mr Evans said.

'Since most economic forecasters envision the current downturn as rivaling the deep recessions of 1974-75 and 1981-85, I think these fiscal programs must be large in order to be effective and to instill badly needed confidence,' he said.

Mr Evans is a voting member of the policy-setting Federal Open Market Committee in 2009.

The Fed will be increasing its nontraditional policies further now that the federal funds rate, its traditional tool to influence economic growth, has been cut to almost zero, Mr Evans said, in a reference to the 'quantitative easing' measures taken by the central bank recently.

'Accordingly, we are faced with the challenge of calibrating these unfamiliar policies and, in the future, determining the appropriate time and methods for winding them down,' he said.

Many of the Fed's moves have been done on the fly in response to 'emerging distress', and the central bank must do a better job communicating its motives to the public, Evans said.

'In a complex and dynamic environment, the public needs effective and transparent communications. As our lending facilities and other policy responses continue to evolve, this is a daunting task,' he said. 'We should strive to do more.' — THOMSON REUTERS