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

By Michael Winfrey and Balazs Koranyi

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.