US economy may face another recession without fiscal aid, Fed's Evans says

The US economy risks a longer, slower recovery, if not another outright recession, if Congress fails to pass a fiscal package to support out-of-work Americans and state and local governments, Chicago Federal Reserve President Charles Evans said on Tuesday.

"Fiscal support is just fundamental," Evans said at a virtual meeting of the London-based Official Monetary and Financial Institutions Forum. His own forecast for the US unemployment rate to fall to 5.5 percent by the end of next year assumes not just a vaccine for the coronavirus but also a US fiscal package of at least $500 billion or $1 trillion, he said.

"Otherwise I think the recessionary dynamics are really going to kick in in a much bigger way," he said.

About 30 million Americans are currently drawing on some form of unemployment insurance.

In a bid to provide its own measure of support for the still-struggling economy, the Fed last week promised to aim for inflation moderately above 2 percent for a certain period so that it averages 2 percent over time. To do so, the US central bank said it would pin interest rates at their near-zero current level until it achieves that overshoot.

Investors, disappointed the Fed did not back up its new promise with further bond-buying, sent stock prices tumbling after that announcement.

While Evans on Tuesday did not rule out more quantitative easing, he made clear he didn't think it was imminent.

"The judgment has to be, what are we looking for in terms of further reductions in term premiums or portfolio balance effects if we were to engage in further asset purchases," he said. "I am open-minded; we will have discussions about this."

The Fed is already buying $120 billion of Treasuries and mortgage-backed securities each month, the yield on the 10-year Treasury is still very low, and the Fed's newly adopted forward guidance is very aggressive, Evans said.

The larger uncertainties at the moment, he said, include fiscal policy, control of the virus, and whether aggregate demand will hit potholes or the economy will be able to thrive.

Evans also said the Fed still needs to discuss its new average inflation target, including when it would "start the clock" on any period for average inflation. But like many of his colleagues, he emphasized there would be no formula.