Chicago Fed chief says Fed will control inflation

Posted May 14, 2010 at 1:27 p.m.

Dow Jones Newswires | Federal Reserve Bank of Chicago President
Charles Evans said Friday he’s confident the central bank will act to
keep inflation under control, although he also said he doesn’t expect
to see much in the way of price pressures, suggesting no urgency in
tightening policy.

“Policy is, appropriately, very accommodative,” Evans said, although
“eventually, we will have to return to a more normal stance.” The
official explained the decision to move away from the current zero
percent interest rate stance “will be based on careful monitoring of
business activity and an alert eye out for signs of changes in the
inflation outlook.”

But so far, it looks like there aren’t any problems on that front. “Inflation will remain relatively stable” and “the current low rates of resource utilization strongly point to lower inflation,” Evans said.

He explained with inflation stripped of food and energy factors now around 1 1/4 percent, “I see the opposing forces of resource gaps and accommodative monetary policy as roughly balancing out over the medium term.” Evans added, “as resource slack abates in a recovering economy, I expect inflation to move up to about 1 3/4 percent by 2012.”

“I am confident that monetary policy will both support economic growth and bring and keep inflation near my guideline of 2% over the medium term,” the official said.

Evans’ comments came from the text of a speech he was to give Friday at an Illinois Wesleyan University Associates Business Luncheon. in Bloomington, Ill. The official does not currently hold voting status on the interest rate setting Federal Open Market Committee meeting. In past remarks Evans has suggested that he sees no urgency to increase interest rates from their current zero percent range.

Most private sector economists believe it won’t be until late this year, if not next year, before the Fed raises rates. Worries about a slow recovery and at best a very modest reduction in the unemployment rate mean the Fed will need to offer support for some time.

Evans spoke before his formal remarks with reporters and said he was “even more comfortable” with the FOMC’s expectation it will keep rates very low for an “extended period.”

Evan’s outlook largely jibes with this outlook. He expects the U.S. gross domestic product to rise by 3.5 percent this year, a “quite moderate” improvement relative to other rebounds. He added “we need to experience a good deal of growth before we return to the more normal pace of economic activity and levels of unemployment that we enjoyed in late 2007.”

Government stimulus should provide a “continued solid boost to spending through much of 2010,” but even as consumers have “increased spending .. concerns remain about the sustainability of the recent strength.” Evans added even as the housing market has shown some strength, the sector “continues to struggle.” Ultimately, “housing market conditions will get better as we move further into the expansion.”

Evans was not particularly hopeful on the jobs front. He cited recent signals the U.S. is near “a turning point” amid mounting job gains, but “even after more solid employment gains materialize, unemployment may remain stubbornly high.” The official said “I anticipate that the rate and length of unemployment will improve relatively slowly.”

The official noted credit availability to small and medium sized firms remains compromised.” He also said “I expect banking conditions to improve and better support growth, but this is likely to take some time.”


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