Chicago Fed boss Evans: Low rates needed for 'some time'

Federal Reserve Bank of Chicago President Charles Evans said low interest rates are likely to be needed "for some time" as high unemployment lingers and inflation stays below his goal.

"With the unemployment rate at 9.7 percent and inflation significantly under my benchmark for price stability, there is no conflict between our policy goals," Evans said in the text of a speech in Arlington, Virginia. Weakness in the job market, including long-term unemployment, means that "This accommodation will likely be appropriate for some time."

Fed Chairman Ben S. Bernanke said last month the U.S. economy is in a "nascent" recovery that still requires low interest rates to encourage demand by consumers and businesses once federal stimulus fades. At the same time, policy makers are winding down emergency programs and laying plans for an eventual reduction of the Fed's balance sheet to prevent an increase in inflation as the economy recovers.

Speaking to reporters after his speech, Evans said he expects the Fed will likely hold its benchmark interest rate target low for the next "three or four meetings" and reiterated his support for the central bank's guidance that rates will stay low for an "extended period."

The Chicago Fed president also said he's concerned that the nation's unemployment rate "might tick up a bit from here."

Hiring

The U.S. jobless rate held at 9.7 percent in February and payrolls dropped 36,000, less than forecast, a sign that the labor market may be stabilizing after a recession that has eliminated 8.4 million jobs. The economy expanded at a 5.9 percent annual pace in the fourth quarter, the fastest rate in six years, the Commerce Department reported last month.

"I find myself in broad agreement with the view that restrictive bank credit, along with business and household caution, will continue to restrain the recovery's strength but that these headwinds will abate as we move through 2010," Evans, who isn't a voting member of the rate-setting Federal Open Market Committee this year, told the National Association for Business Economics 2010 Economic Policy Conference.

The number of long-term unemployed has risen more than forecasters would have expected based on the severity of the recession, Evans said. In February, more than 40 percent of the jobless had been out of work for more than six months, the highest proportion since World War II, he said.

Unemployment Effects

A long spell of unemployment erodes a worker's skills, making it hard to find a job when the economy recovers, he said. "Long-term unemployment tends to lead to permanent earnings losses" and "high unemployment durations could have long- lasting effects on consumer confidence and demand."

Evans's views echoed those of some other Fed bank presidents. St. Louis Fed President James Bullard said last week that economic reports in the past few weeks have been "a little bit softer" and the recovery was not yet firmly established. Dallas Bank President Richard Fisher said March 3 that unemployment may rise back above 10 percent as workers return to the labor force.

In contrast, Fed Bank of Kansas City President Thomas Hoenig dissented in January because he objected to the FOMC's pledge to keep rates low for "extended period" and wanted the Fed to keep "the broadest options possible."

Central bankers plan to cease buying $1.25 trillion of mortgage-backed securities at the end of March and haven't settled on when or if the securities will be sold. They meet again March 16.

Fed Critics

Evans said there is a "legitimate question" of whether Fed policy makers should have done more to try to combat the deterioration in the labor market. Nobel Prize-winning economist Paul Krugman, for example, in January called for the Fed to consider buying another $2 trillion in assets.

"Leaving the current highly accommodative monetary policy in place for too long would eventually fuel inflationary pressures," Evans said today. "Likewise, if the monetary base was expanded much beyond where we are today, the risk that such pressures would build as the economy recovers would be significantly increased."

He repeated previous Fed statements that "the Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets."