March 16, 2012 / 7:01 PM / 7 years ago

Fed's Evans sees risks in 'siren calls' to hike rates

FRANKFURT (Reuters) - Despite recent “encouraging” economic news, the Federal Reserve should do even more to boost growth, or risk stagnation that could persist for a decade or more, a top Fed official said on Friday.

The Fed earlier this week repeated its pledge to maintain ultra-low interest rates until at least late 2014, but a pronounced drop in unemployment has sparked increasing speculation in financial markets that the U.S. central might begin to raise rates much sooner.

But Chicago Fed President Charles Evans, in remarks prepared for delivery at the International Research Forum on Monetary Policy in Germany, said the Fed needs to keep juicing the economy with low borrowing costs.

With growth too slow to quickly bring down a still-high jobless rate, “monetary policy can and should take additional steps to facilitate a more robust economic expansion,” he said.

Evans said he did not believe inflation is on the verge of spiking above the Fed’s 2 percent goal or that unemployment is stuck at high levels for structural reasons.

“I just don’t see the evidence out there supporting this view,” he said. “But if we do buy into it, then we’ll end up following overly restrictive policies that could unnecessarily risk condemning the U.S. economy to a lost decade—or even more.”

Evans is one of the Fed’s most dovish policymakers, more concerned with the threat of high unemployment than inflation

The U.S. central bank has kept rates near zero since for more than three years. It has also bought $2.3 trillion in long-term securities to push down borrowing costs further and give a boost to the recovery from the worst downturn in decades.

Although financial markets have been carefully watching the Fed for signs that it might initiate a third round of bond purchases to give another spur to the economy, the sharp drop in the unemployment rate to 8.3 percent in February from 9.1 percent in August has led some analysts to rein in expectations for further easing.

Other economic data recently has also pointed to an improving economy, and futures traders are now pricing in a first Fed rate hike by November 2013, roughly 12 months earlier than the Fed says it might likely hike rates.

Evans, however, warned of risks associated with expectations that the Fed could start to move sooner than its targeted date, saying such an outlook “may be diminishing the degree of accommodation in place today.”

To counteract that possibility, he said, the Fed should move away from policy tied to a calendar date and instead vow to maintain low rates until specific economic conditions are met.

Doing so would tie Fed policy to low rates, like a modern-day Ulysses tied to the mast, allowing it to avoid “the siren calls of premature tightening,” he said.

Evans repeated his call for the Fed to keep rates low until either unemployment falls below 7 percent or inflation threatens to rise above 3 percent.

The Fed’s post-meeting statement on Tuesday offered few clues on prospects for further monetary easing, offering a slight upgrade to its economic outlook while restating concerns about the high level of unemployment and projecting inflation to run below its 2 percent target.

Reporting by Sakari Suoninen in; writing by Ann Saphir; Editing by Leslie Adler

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