Fed's Evans says low inflation gives Fed breathing room

NEW YORK (Reuters) - Charles Evans, president of the Chicago Federal Reserve Bank, said on Monday he expects the U.S. economy to grow 3.0 to 3.5 percent over the next 18 months, but that low inflation will give the central bank room to keep monetary policy easy for an extended period.

Next year "will definitely be a better year" than 2009, Evans told business television channel CNBC in an interview, but added he expects the jobless rate to creep up further.

Evans said he expects the U.S. jobless rate -- currently at 10 percent -- will edge up "a few tenths" before coming down. He said he sees the jobless rate peaking in the spring or summer of 2010.

The Federal Reserve, after its December policy-setting meeting last week, voiced growing optimism about the U.S. economy, but repeated its pledge to keep interest rates unusually low for "an extended period."

The Fed cut its benchmark overnight interest rate to near zero last December to promote economic recovery and has kept them there since.

Evans, a voting member of the policy-setting Federal Open Market Committee this year, said to him "extended period" means about three to four meetings.

"I've said before, that to me that seems like its about three to four meetings and next meeting we'll recalibrate that again. I don't see an urgent need to recalibrate," Evans said.

He said inflation expectations seem anchored and that substantial resource slack is "diminishing the trajectory of inflation, I would say over the next couple of years."

This gives the Fed breathing room on policy, he said.

"At the moment, core inflation is about 1.4 percent and my own guideline is 2.0 percent. We do have some room. If things change quickly, we'll recalibrate policy quickly, but I think inflation is relatively slow moving and we have time," Evans said.

(Reporting by Kristina Cooke; Editing by Dan Grebler)