The U.S. economy’s recovery is likely to be slow, and the outlook is for stable inflation, Federal Reserve Bank of Chicago President Charles Evans said Thursday.
While leaving current monetary accommodation in place too long could fuel inflation eventually, removing it prematurely could “choke off recovery,” he said the prepared text of a speech in Chicago.
“I anticipate that restrictive bank credit, along with business and household caution, will continue to restrain the recovery’s strength,” Evans said. “Inflation will remain relatively stable.”
The U.S. economy is likely to grow at 3 percent to 3.5 percent this year, and inflation is likely to rise to just 1.75 percent – near his own guideline of 2 percent, he said.
Evans’ comments come the day before the U.S. government is expected to report a slight rise in joblessness to 9.8 percent, and as economists try to figure out how long the Fed will continue to hold interest rates at near zero.
The U.S. central bank has held rates at rock bottom levels since December 2008, and has promised to keep them there for “an extended period.” The bank also added more than $1 trillion to its balance sheet, buying mortgage-backed securities in a bid to further ease financial conditions. That asset-purchase program is slated to end this month.
“A large challenge facing policymakers over the next couple of years will be judging the appropriate timing and pace for reducing accommodation,” Evans said.
“On the one hand, removing too much accommodation prematurely could choke off the recovery. On the other hand, as I noted, if the Fed leaves the current level of accommodation in place too long, inflationary pressures will eventually build.”
The Fed is carefully monitoring business activity and is alert for signs of nascent inflation, he said.
The Fed can also promote financial stability by conducting regular stress tests of banks like those performed at the height of the financial crisis, he said. Such stress tests depend on the Fed’s ability to have good information about banks’ financial health.
In addition, he said, bank supervisory powers give the Fed crucial insight into the health to the economy.
“Since a recovery in bank lending capacity and inclination will be an important indicator of self-sustaining momentum in the recovery and of the appropriate time to adjust monetary policy, this information is crucial now more than ever,” he said.
Separately, Evans Thursday released a March 2 letter to 10 US senators calling on them to let the Fed keep its bank supervisory powers.
By Ann Saphir – reuters.com
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