Hard to understand why Fed won't do more, Evans says

CHICAGO (Reuters) - Chicago Federal Reserve Bank President Charles Evans, one of the U.S. central bank's strongest advocates for further monetary policy easing, said Wednesday he is flummoxed by the Fed's timid steps to boost the economy.

At its policy-setting meeting last week, Fed officials sharply slashed their gross domestic product forecasts for 2012 and 2013 and marked down the outlook for inflation.

Those changes to the U.S. central bank's summary of economic projections, or SEP, suggest progress on its twin goals of full employment and stable prices is slowing if not stalled.

And yet, instead of reacting with a new program of bond buying to boost jobs, the Fed took the much more modest step of adding six months to a bond maturity-extension program meant to lower long-term interest rates.

"I think if you look at our projections and the SEPs, it's hard to understand why we wouldn't be willing to do more because the inflation outlook is lower than our objective," Evans told a small group of reporters at the Chicago Fed headquarters.

With unemployment at the "completely unacceptable" level of 8.2 percent and inflation set to fall, the Fed should be ramping up its already significant level of accommodation, Evans said. Although the Fed said in January it will take a "balanced approach" to meeting its goals, Evans suggested Wednesday the central bank has fallen short of doing so.

"I don't think we've clarified what we mean by ?balanced approached' at all," said Evans, who grimaced at times as he described an economy close to stall speed and faced with risks from Europe's crisis and elsewhere.

"I think that a balanced approach means I'd be willing to undertake accommodative policies at some risk of increased inflation - it's below our target - at some risk of increasing it above that by some amount," he said. "How much? How much? That's a fair question, we are not offering very much in delineating that."

The Fed last week also kept its guidance that rates will stay low until at least late 2014, tying policy to the calendar in a fashion that virtually no Fed policymaker appears to support wholeheartedly.

Evans, for his part, said the Fed needs to provide more clarity around that guidance, and reiterated his view that the central bank should promise to keep rates row until unemployment falls to 7 percent, or inflation threatens to rise above 3 percent.

It should also be clearer about how far inflation would need to deviate from the Fed's 2 percent inflation target, either above or below, he said.

Yet Evans suggested the Fed's communications sub-committee, of which he is a member, is not close to adopting new color to its current guidance.

"We are trying to understand the implications of what we've put in place, and whether or not there are simple enhancements, or alternative enhancements, that could improve things," he said.

Before committing to further quantitative easing, the Fed last week appeared to want to give European policymakers a chance to stabilize the crisis-stricken euro zone, warning of "significant downside risks to the economic outlook," including Europe's sovereign debt crisis.

Fed Chairman Ben Bernanke also said he was watching to see if jobs data might improve before unleashing any new round of bond purchases.

Evans said the Fed already has plenty of data. He expects the economy to grow between 2 percent and 2.5 percent this year and next, and inflation to come in below the Fed's 2 percent target over that same time period.

"I think we should be doing more accommodation," he said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)