Evans says risk of weak growth dulled by Fed moves

By Ros Krasny

CHICAGO (Reuters) - Chicago Federal Reserve Bank President Charles Evans said on Tuesday that the U.S. central bank has probably cut interest rates enough to ward off the chances of economic growth slowing more than expected.

"While the risk is still present of notably weaker-than-expected overall economic activity, given the policy insurance we have put in place I don't see this as likely," Evans said in remarks to the Futures Industry Association conference.

Evans warned that overly accommodative policy by the Fed "could endanger price stability" at a time when recent signs on inflation have been "encouraging."

Evans took over at the Chicago Fed from Michael Moskow in September and is a voting member of the Federal Open Market Committee in 2007.

The final FOMC meeting for the year is set for Dec 11. Financial markets point strongly to another one-quarter point cut in the benchmark federal funds rate at that meeting, to 4.25 percent, and a further cut to 4 percent in January.

The Fed in October said that "the upside risks to inflation roughly balanced the downside risks to growth."

"My reading of the data since then continues to support this risk assessment," Evans said.

"As of today, I feel that the stance of monetary policy is consistent with achieving our dual mandate objectives and will help promote well-functioning financial markets."

U.S. economic growth will be soft in the fourth quarter before slowly returning toward potential -- estimated at slightly above 2.5 percent -- "later in 2008," Evans said.

He said the core personal consumption expenditures (PCE) price index, which strips out volatile food and energy prices, should hold in the 1.5 percent to 2 percent range in 2008 and 2009.

Headline inflation should retreat during that time to be roughly in line with the core rate, Evans said, adding that "relative to our outlook six months ago, this is a favorable development."

Evans said U.S. payrolls are expanding "in line with demographic trends and an economy growing at potential. This is a key fundamental supporting the forecast" for a rebound in growth in 2008.

Despite Evans's relatively upbeat outlook, he said the reevaluation of securities risk that has fed the current crisis in credit markets will take some time, and more turmoil can't be ruled out.

Housing markets will also continue to struggle in 2008, although their drag on overall economic growth should diminish compared with 2006 and 2007 levels, Evans said.

Still, many subprime adjustable rate mortgages will be adjusted to higher interest rates over the next few months, "a process that could feed back on to housing and financial markets," he said.