Fed's Evans says low interest rates likely here for "some time"

ST. LOUIS, Sept 28 (Reuters) - Weak growth, an aging workforce and poor productivity may leave the U.S. economy stuck with low interest rates for years to come, and the Federal Reserve struggling to reach its inflation target, Chicago Fed President Charles Evans said on Wednesday.

As some in the financial industry press for higher interest rates to improve their lending margins, Evans offered a sobering counterpoint: It’s not likely to happen fast, and that is not the Fed’s fault.

The steady decline in estimates of equilibrium interest rates, Evans said, means monetary policy is not as loose as many analysts estimate, there is less risk of inflation rising too fast - and less reason to move the policy rate higher.

“The low interest rate environment is not just a U.S. phenomenon, or simply a situation engineered by Federal Reserve policy,” Evans said in remarks prepared for a conference on community banking in St. Louis. “Rather, it is a global phenomenon with underpinnings in economic fundamentals.”

“U.S. policy today is less expansionary than what is often calibrated from simple monetary policy rules or other historical comparisons,” Evans said. “The risk of overshooting our 2 percent inflation is lower - and the likelihood that we actually get to 2 percent is smaller.”

Evans, one of 12 regional bank presidents, does not currently have a vote on the Fed’s rate-setting policy committee. But his comments are in contrast to many of his regional bank colleagues who have begun to speak out more forcefully in favor of a rate increase.

Three regional Fed presidents dissented from the central bank’s decision last week to keep rates steady, and several have begun citing concerns about financial stability and the need for the Fed to act in time to prevent any rapid run-up in prices.

The other main body of thought at the Fed, with strong adherents within its more influential, Washington-based board of governors, argues that the global economy is proving far more sluggish than expected in the wake of the 2007-2009 financial crisis.

The Fed raised rates last December for the first time in nearly a decade, and many investors currently expect it to do so again this coming December. But the debate is far from over. Among 10 Fed policymakers speaking this week, opinions ranged from a demand to hike now to Evans’ view of long-term weakness and several shades of gray in between.

Evans told bankers on Wednesday that they may need to plan carefully for a “new normal” of low rates, rather than hope for the return to an era when a larger gap between deposit and lending rates gave them more flexibility to compete by paying savers more and turning those funds into profitable loans.

The fundamentals at work, Evans said, include a developed world workforce that is growing older and retiring and productivity growth that has lagged with no quick pickup expected.

“We will likely be in a low interest rate environment for some time,” Evans said. “This is one reason monetary policy is expected to normalize at a very gradual pace.” (Reporting by Howard Schneider; Editing by Paul Simao)