September 27, 2013 / 10:34 AM / 5 years ago

UPDATE 2-"Decent chance" Fed can start tapering this year: Evans

* Economic outlook compatible with tapering

* Lack of confidence could put it into next year

* Inflation overshoot possible but below 3 pct OK (Releads, add policy outlook, tapering)

By Balazs Koranyi and Camilla Knudsen

OSLO, Sept 27 (Reuters) - There is a “decent chance” the U.S Federal Reserve can start to wind down its monetary stimulus this year but there are risks which could push that process into next year, a senior Fed official said on Friday.

The Fed earlier this month surprised markets when it postponed reducing its $85 billion a month bond purchases, arguing that it needed to wait for more evidence of solid economic growth.

“(The economic) outlook strikes me as compatible with reducing the flow of purchase rate,” Charles Evans, president of the Chicago Federal Reserve Bank told reporters in Oslo on Friday.

“But whether or not we’ll have enough confidence at the October meeting or the December meeting, I just can’t say that with a lot of certainty. I think there’s a decent chance of that. But it could go a little bit longer,” said Evans in his first public remarks since the Fed’s decision.

Evans said the asset purchases could total $1.25 trillion from the start of the year to its eventual end, and the overall size was a more important factor than when it would be reduced.

Some economists say it is possible the Fed might not begin to wind down its bond buying until after Ben Bernanke’s term as Fed chairman expires in January. That would leave the tricky task of unwinding the stimulus to his successor, possibly Fed Vice Chair Janet Yellen who was identified by a White House official this month as the front-runner for the job.

Evans said his decision this month “came down to how much confidence I had that the recent improvement in the employment report and the labour market in general would be continued,” Evan said. “I’ve been surprised to see such a large reduction in the unemployment rate without fairly strong GDP growth.”

He added that gross domestic product growth could continue to accelerate, hitting 2.5 percent in the second half of this year, then reaching 3 percent or more in 2014, even if this was “still too much a forecast”.

And weak household consumption along with a lower-than-expected labour market participation rate were risks.

INFLATION

Evans also said the Fed should be flexible with its inflation objective and though there was a risk it would overshoot its goal, this is not an issue as long as price growth remains below three percent.

The Fed’s current monetary policy “admits the possibility of overshooting our inflation objectives,” Evans said. “That’s not a goal but it could be a feature, in order to have accommodating conditions that support maximum employment, so that’s really very helpful.”

“We could even do this as long as inflation was below 3 pct because I think symmetry around the inflation target is incredibly important,” he added.

The Fed targets inflation to be no more than a half a percentage point above its 2 percent long-term target.

Evans added that better than expected growth in U.S. GDP between 2009 and 2010 could be attributed to “favourable forward guidance shocks”.

While GDP growth from 2011 to 2013 fell short of forecasts because of “massive headwinds,” Evans said it would have done even worse but for the Fed’s promise to keep interest rates close to zero for an extended period.

Evans also said that “degrading” monetary policy by using it to fight financial instability would lead to inflation that is below the Fed’s 2 percent target and to more resource slack. (Additional reporting by Ann Saphir in Chicago; Editing by Ruth Pitchford)

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