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Federal Reserve

Bank of Chicago President Charles Evans said Saturday the U.S. is in a "bona fide liquidity trap" and advocated strong policy measures to remedy the situation, according to published media reports.

In a speech prepared for a conference on monetary policy held by the Boston Fed, Evans said "much more policy accommodation is appropriate today," in light of the challenges faced by the U.S., according to a report in

The Wall Street Journal


Evans added that one thing the Fed could do to combat deflation would be to raise its longer-run inflation target, at least for a period of time, the report said. However, Evans said the Fed would have to communicate that policy clearly.

Evans referred to such a policy as price-level targeting and said it "would be a helpful complement to our current and prospective strategies in the U.S," according to the report. "There are quite a number of academic studies of liquidity-trap crises that find either price-level targeting or temporary above-average inflation to be nearly optimal policies."

The Chicago Fed chief acknowledged, however, that this idea would likely generate a lot of resistance among central bankers and the public, the report added.

A liquidity trap refers to a situation in which monetary easing fails to stimulate the economy.

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Market participants now expect the Fed to embark on another round of quantitative easing to bolster the economy, something that has come to be referred to as "QE2."

On Friday, Chairman Ben Bernanke assured the market that the central bank is carefully evaluating additional policy options, and now investors are trying to gauge just how aggressive those steps will be.

This article was written by a staff member of TheStreet.