DETROIT, Feb 4 (Reuters) - The Federal Reserve will likely keep interest rates near zero until late 2015, a top Fed official said on Tuesday, adding that raising rates before then to fight risks to financial stability would be a “poor choice.”
“I currently expect that low inflation and still-high unemployment will mean that the short-term policy rate will remain near zero well into 2015,” Chicago Federal Reserve President Charles Evans said in remarks prepared for delivery to the Detroit Economic Club.
The Fed slashed rates to near zero in December 2008 and has kept them there ever since in an effort to boost growth and hiring in the face of the worst recession in decades. It has also bought trillions of dollars of Treasuries and mortgage-backed securities, swelling its balance sheet to $4 trillion in a bid to force down long-term borrowing costs as well.
The economy enters 2014 with much better momentum, Evans said Tuesday; the headwinds it has faced, including fiscal restraint, have receded. In a nod to such improvement, the Fed began in December to reduce its massive bond-buying program, and last week cut it again, to $65 billion a month.
But Evans warned that risks remain, with unemployment at 6.7 percent, well above the 5.25 percent he views as consistent with a healthy economy, and with inflation running at about half the Fed’s 2 percent target.
“Monetary policy is highly accommodative, and needs to remain so for some time,” said Evans, who does not have a vote on the Fed’s policy-setting committee this year.
By the time the Fed begins raising rates, Evans said on Tuesday, they will have been near zero for a “startling” seven years.
Some of his colleagues at the Fed have warned that keeping rates low for so long could lead to runaway inflation and could encourage investors to take outsized risks, threatening the stability of the financial system.
On Tuesday, Evans said he saw very little chance of high inflation, and indeed was more worried about the deleterious economic effects of inflation staying low for too long. And while he acknowledged that low rates could encourage risk-taking in pockets of the economy, “these risks currently do not warrant altering the stance of monetary policy,” he said.
In fact, he argued, raising rates to stem the threat of financial instability would hurt employment and push inflation down further, paradoxically increasing the chance of a financial crisis.
“This approach would be a particularly poor choice when other tools are available, at lower social costs, to address financial stability risks,” he said.