Fed's Evans: U.S. growth could resume by year-end

Federal Reserve Board Chairman Ben Bernanke poses with board members of the Federal Open Market Committee, March 17, 2009.

PRAGUE (Reuters) - The Federal Reserve could expand its already vast efforts to restore normal functioning in financial markets, and growth in the United States should resume by the end of this year, a top Fed policymaker said on Tuesday.

Charles Evans, president of the Chicago Fed, also said U.S. inflation risks were on the downside despite heavy liquidity expansion, but unemployment there could rise above the Fed's 8.5 to 9 percent forecast.

Speaking at a banking conference in Prague, Evans also said that private investors' apparent willingness to participate in the Term Asset-Based Securities Lending Facility, or TALF, and other stabilization programs, was a positive sign.

"The Federal Open Market Committee's policy decisions have been calibrated to deal with the 'adverse feedback loop' between disruptions to financial market stability and the real economy," Evans said in a speech in Prague.

"They will also have a stabilizing effect on markets around the world and will therefore eventually stimulate worldwide economic recovery." Evans is a voting member of the FOMC in 2009.

The global financial system is suffering the worst crisis in 70 years, and the Fed, for its part, has needed to do more even after slashing its target for the federal funds rate to essentially zero in December, Evans said.

Betting in financial markets shows dealers suspect the Fed could keep rates at next to zero through year-end.

"Financial distress, the weak outlook for growth and the prospects for unusually low inflation call for more policy accommodation," Evans said.

Ultimately the FOMC will resume its focus on traditional monetary policy, Evans said -- echoing a joint statement made on Monday by the Fed and the U.S. Treasury.

NO INFLATION RISK

He said that despite the heavy liquidity measures being enacted by the U.S. Treasury and Fed, inflation risks were low.

"In fact, there are disinflation forces that are a bit of more concern at the moment," he said.

But he added that worse-than-expected unemployment data could indicate jobless figures may exceed the Fed's outlook. "Our own forecast has (unemployment) in the territory of 8.5-9 percent," Evans said. "I'm a little concerned that the more recent employment data have been a little negative for that forecast. So the risks are that it comes in higher than that."

"I expect that before the year is out, we'll see positive growth rates for the GDP in the U.S. but it will not feel especially good because the unemployment rate is likely to going to keep going up and the labor market won't truly improve until the beginning of 2010," he added.

Evans said "we will be expanding existing programs," including the TALF, now under way, and the FOMC's decision last week to buy up to $300 billion in longer-term Treasury debt.

"When economic activity recovers and financial conditions normalize, the use of non-traditional policy tools and the size of the Fed's balance sheet will be reduced," he said.

Some of the wind-down process will happen naturally, while other facilities will likely be dismantled as the economy improves, Evans said.

For example, loans being made under TALF, which is aimed at restoring lending at the consumer level, "are attractive during current market conditions, but are more costly than those that prevail during more normal times," he said.

Since TALF was announced conditions in the asset-backed securities market have already improved, Evans said, adding that the program, with its three-year loans, "can impact longer-run interest rates."

Still, the market must be "prepared for the eventual dismantling of the facilities that have been put in place during the market turmoil," he added.

(Additional reporting by Ros Krasny, Peter Laca; Editing by Andy Bruce)