Fed's Evans sees 2009 U.S. recovery in some doubt

By Ros Krasny

LOST PINES, Texas (Reuters) - The U.S. economy is facing "extraordinary turbulence" that makes an expected recovery in 2009 more uncertain, a top Federal Reserve policy-maker said on Monday.

"Given the financial stress we're looking at, it's difficult to see that the first-half 2009 outlook will be better than we thought," Evans told reporters after a speech to the Association for Manufacturing Technology meeting in Lost Pines, Texas.

"I'll be marking down my forecast for 2009."

The U.S. central bank's decision to stop lowering its benchmark fed funds rate at 2 percent was based in part on prospects for the economy to revive as the impact of huge rate cuts kicked in on a lagged basis to support growth.

But the timing of a recovery will be linked with an improvement in financial markets and unfreezing of credit conditions, Evans said.

"The growth outlook for 2009 is premised on financial conditions returning to 'better.' Not 'normal' from a few years ago, but better than now," he said.

Evans declined to comment on what specific events would force the Fed to lower benchmark U.S. interest rates again.

However, he warned that although the impact of an implosion in credit markets may not have had wide-ranging impacts on all aspects of the economy so far, that too would likely kick in on a lagged basis.

"Increases in LIBOR have translated into higher bank borrowing rates for many of you in this room," he told an audience of manufacturers.

LIBOR, or the London interbank offered rate, is a key interest rate on short-term interbank loans that drives the level of rates on many loans to households and businesses.

Financial markets that measure sentiment toward likely Fed policy are confident that the U.S. central bank will lower its benchmark rate to 1.5 percent from 2 percent at or even before its October 28-29 Federal Open Market Committee policy meeting.

Evans is not a voting member of the FOMC in 2008 but will vote on interest rate changes in 2009.

INFLATION FEARS WANE

With crude oil prices back below $90 per barrel, other commodity prices far below recent highs and market-based inflation expectations at multiyear lows, Evans allowed that he was now "somewhat less" worried about inflation.

"We should see some improvements," he said. Still, "the inflation outlook remains a risk. Energy and commodity prices are notoriously volatile, and could rise again," he said.