Fed's Evans sees economy achieving 'escape velocity' by 2014

DES MOINES, Iowa Thu Feb 28, 2013 8:19pm EST

DES MOINES, Iowa Feb 28 (Reuters) - The U.S. economy should emerge from the doldrums next year as long as the Federal Reserves sticks to its super-easy monetary policies long enough to give it the traction it needs, a top Fed official said on Thursday.

"I am optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014," Chicago Fed President Charles Evans said in remarks prepared for delivery to the CFA Society of Iowa.

"But we need to be careful not to undermine our own policies and remove accommodation prematurely, as the Japanese did."

Evans has been a key player in shaping the Fed's ultra-easy policy stance, and was the first to champion the idea of tying Fed policy to specific levels of unemployment and inflation.

In December the Fed adopted his plan, saying it would keep interest rates near zero until the unemployment rate drops to at least 6.5 percent, as long as the inflation outlook does not top 2.5 percent. Unemployment is currently at 7.9 percent.

The Fed is also buying $45 billion in Treasuries and $40 billion in mortgage bonds per month, in its third round of so-called quantitative easing, and has said it would continue the purchases until it sees substantial improvement in the labor market outlook.

Fed officials backed QE3 in an 11-1 vote in January, but minutes of that meeting released last week suggested a growing number of officials had concerns about the risks and costs of the central bank's policy course.

On Thursday, Evans made clear he was not among those skeptics, brushing off warnings of "froth" in financial markets as speculative, and calling high inflation a very unlikely outcome of current Fed policies because wage pressures are all but absent.

Instead, Evans focused on the benefits of current Fed policy, saying he sees evidence they are working in the rise in the stock market, easier credit conditions and an increase in housing and car sales.

Evans forecast the U.S. economy would grow at about 2.5 percent to 3 percent this year, speeding up to between 3.5 percent and 4 percent next year. Those expectations, he said, are predicated on the Fed keeping up its accommodative stance.

Unemployment will likely fall to close to, or a little below, 7 percent by the end of next year and to 6.5 percent by mid-2015.

On Thursday, Evans warned against "complacency," saying the economy still faces downside risks and urging the central bank not to withdraw its easy policies too soon, especially because of the downside risks posed by potential U.S. fiscal tightening.

Japan's central bank failed to be aggressive enough, he suggested, miring that country in slow growth and deflation that serves as a warning for U.S. monetary policy.

"It is the specter of repeating the Japanese experience that now keeps me up at night," Evans said.

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