UPDATE 1-Fed's Evans: low inflation does not need policy response now

Thu May 9, 2013 11:24am EDT

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May 9 (Reuters) - U.S. inflation is undershooting the Federal Reserve's ideal, but it is not so low that the central bank should move to add still more stimulus to the economy, a top Fed official said on Thursday.

"I think it's way too early to think like that," Chicago Fed President Charles Evans said in an interview on Bloomberg TV, asked if low inflation requires a policy response from the Fed.

Evans said he expects inflation to rise back to about 1.5 percent, still lower than the Fed's 2-percent target.

Given such low inflation and unemployment that is still too high, "I think we should try as hard as we can" to turn things around, he said, and only then should the Fed consider easing off its stimulus.

The Fed is currently buying $85 billion in Treasuries and mortgage-backed securities each month to spur growth and hiring.

Those asset purchases have given a boost to the labor market, Evans said, pushing average monthly job gains to 200,000 over the past six months and helping push down unemployment to its current level of 7.5 percent.

The number of Americans filing new claims for unemployment benefits dropped to its lowest level in nearly 5-1/2 years last week, a U.S. government report showed early Thursday. [ID: nL2N0DQ1NL]

"I'd like to have confidence we can sustain that improvement in the labor market through this summer," Evans said.

A few policymakers have suggested the Fed may need to act to defend the economy against overly low inflation. Others say the Fed should stop its bond-buying, with Philadelphia Fed President Charles Plosser saying it has not helped the labor market much.

"I'd like to stop but I would particularly like to see us begin to slow the pace down, gradually ease our way out of this if we possibly can," Plosser said on Bloomberg television earlier on Thursday.

Evans' call for continued, but not increased, stimulus appears to reflect the view at the core of the Fed's policy-setting committee, which voted 11-1 on May 1 to continue the bond-purchase program known as QE3 because it is the Fed's third round of quantitative easing.

A voting member this year on the Fed's policy-setting panel and a strong advocate of stimulus, Evans said that once the labor market outlook shows substantial improvement, the Fed could end bond purchases gradually or abruptly.

Even after QE3 is phased out, Fed policy would stay easy. Evans was a chief architect of the Fed's policy, adopted last December, to keep short-term interest rates low until unemployment falls to at least 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.

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