MNI POLICY: Evans-Tightening to Aid Stability May be Lose-Lose

Chicago Federal Reserve President Charles Evans warned on Tuesday that reducing asset purchases or hiking interest rates in a bid to curtail investor excesses could undermine the strength of markets and the economy.

"The result could be a lose-lose scenario," Evans said in text of a speech to the the Allied Social Science Associations annual meeting. "Premature tightening of monetary policy could not just threaten the achievement of our dual mandate objectives, but might not even improve financial stability either, given that financial stability is bolstered by a strong economy."

Evans, who joined the FOMC's voting group this year, said those kinds of moves could make the Fed less predictable and credible. That's extra important with policy makers recently introducing new medium-term policy goals along with forward guidance around plans to hold borrowing costs close to zero and purchase at least USD120 billion a month in debt.

"This lack of predictability would also raise the level of risk premiums in financial markets being generated by policy uncertainty instead of by underlying economic fundamentals," Evans said.

"Financial stability objectives are best addressed through supervision and regulation rather than through monetary policy tools," he said. In this era of low-for-long interest rates, other regulators and financial firms should take a deeper look at their risks, Evans said.

The speech didn't give an update on the current outlook besides echoing remarks given Monday that while the recent rise in Covid cases is troubling, vaccines may help bring the pandemic under control later this year.