Charlie Evans: We're Gonna Need A Bigger Boat
Just when you thought it was safe to go back into the water.
Chicago Federal Reserve President Charles Evans was just out making some extremely dovish comments, and there is a chance he could be more dovish then the ultimate dove: Federal Reserve Chairman Ben Bernanke.
Evans, 53, speaking in London at the European Economics and Financial Centre's Distinguished Speaker Seminar, said that he wants the Federal Reserve to provide significant amounts of added accommodation. He said that the resource slack has put downward pressure on prices, and the Fed should not be afraid of temporary higher inflation. He even went so far to say as to target monetary stimulus to a specific unemployment level, 7.5%.
“Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation,” Evans said in his prepared speech. “Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2 percent.”
Evans is well known to be dovish, but considering these comments, as well as the comments he made on CNBC last week, some would have to question whether Evans is the ultimate dove on the Fed.
The Federal Reserve is divided into two camps, with Bernanke leading the doves, and Dallas Federal President Richard Fisher being the most vocal of the hawks. With these two speeches so close to one another, it looks as if Evans is racing to become the number one dove on the Fed. Some might even call him crazy. Why would additional quantitative easing work now, when it has not really worked the first two times? The unemployment rate in the country is 9.1%, and the U6 rate (underemployed and people who fell off the continuing claims line) is over 16%. It has not moved since President Obama took office in 2009. Since Obama took office, the Fed has done over $2 trillion in quantitative easing, mostly to no avail.
Evans voted for the Federal Open Market Committee (FOMC) to keep the overnight lending rate between banks near zero through at least mid-2013, and is now causing for more easing. His reasoning? We do not want to be in the same position next year. In comments captured by Bloomberg, Evans said, “I'm sure everyone will agree that we seriously don't want to be in this position again at this time next year." Evans went on to say that one challenge of monetary policy “is to take actions that respect both the feasibility of what monetary policy can accomplish and the enormous risks to the future prospects of the U.S. economy.”
Many expect the Fed to do another round of quantitative easing, known as "Operation Twist". In this program, the Fed would sell short term securities to fund the purchase of longer-dated securities. It was first enacted during the 1960's under the Kennedy administration.
To me, it sounds like Evans is not only advocating for Operation Twist, but for expanding the balance sheet. To get the unemployment rate to 7.5%, that could mean trillions in purchases, or perhaps the continual expansion of the Fed's balance sheet.
The very definition of insanity is doing the same thing over and over and expecting different results, so why would more QE work now? U.S. dollar be damned, Evans seems hellbent on ratcheting up inflation, albeit temporarily, and unemployment far lower than where it is today. That could mean a Fed balance sheet of $3 trillion, or perhaps, even higher.
If Evans gets his way, the Fed will not need just a bigger boat. It will need the Titanic.
Traders who believe that Evans and the doves get their way might want to consider the following trades:
- Go long commodities, such as gold and silver. The U.S. dollar seems destined to go to lower, and Evans wants to make sure of this.
- Also consider tech, which generates a lot of revenues overseas. Names like Apple (NASDAQ: AAPL) VMware (NYSE: VMW), and Amazon.com (NASDAQ: AMZN) may benefit.
Traders who believe that the hawks will push for analysis before easing may consider alternate positions:
- If something does not happen at the September FOMC meeting, we could see a sharp sell off in risk assets. Consider going long the CurrencyShares Swiss Franc Trust (NYSE: FXF), as it is still a safe haven.
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