CHICAGO (MNI) – The following is the first part of the full text of
remarks by Chicago Federal Reserve President Charles Evans Tuesday
morning, giving his outlook for the economy, inflation and the ongoing
sovereign debt crisis in Europe. Evans, who will be an FOMC voter in
2011, warns that leaving accommodative monetary policy in place for too
long would eventually fuel inflationary pressures:

Thank you, Madlyn, for that kind introduction and very warm
welcome. I’d also like to extend a special thank you to Greg O’Leary for
helping to arrange my visit to the University Club and the Civic Affairs
Society Breakfast Forum. I’m especially pleased to be here this morning
to explain what I see happening in the economy and express my views on
some of the key issues we face today. Over the past couple of years I
have been asked many times to speak about the Federal Reserve’s role in
addressing the financial crisis. Usually, at the end of the talk, when I
open the floor for discussion, I find myself being asked the same sorts
of questions over and over again. So I’d like to address some of those
questions in my remarks today and then give you an opportunity to follow
up with questions of your own.

Let me emphasize that the views that I am presenting today are my
own and not necessarily those of the Federal Open Market Committee
(FOMC) or my other colleagues in the Federal Reserve System.

Let’s begin with the question I hear most often: What are the
prospects for the economy?

In short, the economy is recovering from the recession, and I am
optimistic that it will continue to do so. My forecast is that real
gross domestic product (GDP) will grow about 3-1/2 percent this year. In
fact, we have been hearing many more upbeat business reports over the
past several months, and have nudged up our outlook accordingly.

That said, we still need to experience a good deal of growth before
we return to the more normal pace of economic activity and levels of
unemployment that we enjoyed in late 2007. And the 3-1/2 percent pace of
growth I anticipate is quite moderate given the severity of the
recession. To offer some perspective, in the first year and a half
following the deep 1981 to 1982 recession, growth averaged nearly 8
percent.

Let me give you some of the details underlying this assessment of
the economy.

First, consider the recent GDP numbers, which measure the value of
all of the goods and services produced in the economy. GDP fell
sharply-3.7 percent all told-during 2008 and the first half of 2009. But
GDP has increased in each of the past three quarters, with growth
averaging a 3.6 percent annual rate.

Where did this growth come from? Some of it reflected the federal
government stimulus package passed in 2009. This raised economic
activity a good deal in the second half of last year, and should be a
continued solid boost to spending through much of 2010.

But government stimulus is hardly the whole story. Unmistakably,
private spending has been reviving. One area is inventory investment by
businesses. During the recession, firms aggressively cut inventories to
very lean levels. By avoiding an overhang of excess stocks, they are now
increasing orders for newly produced goods to meet incoming demand-and
we’ve seen manufacturing production increase accordingly. We have also
seen an increase in business spending on capital equipment, most notably
on high-tech items, as firms replace and upgrade their IT systems and
other equipment in order to maintain competiveness and profitability.

Consumers also have increased spending. Job worries and losses in
household wealth had caused consumers to cut back on spending
appreciably during the recession. But they have now begun to reopen
their pocketbooks. During the first quarter of 2010 total personal
consumption expenditures increased at a 3-1/2 percent annual rate.
Significantly, these increases were distributed across many different
types of goods and services. Even in the hard-hit automobile sector,
sales have averaged over 11 million units annual rate so far this
year-up over 17 percent from a year ago, though still well below the
pace of 16.6 million units that prevailed before the recession.

In contrast, housing continues to struggle. During the second half
of 2009, both sales and new construction lifted off from the recession
low points seen around the turn of last year. But sales fell back after
the expiration last November of the first round of tax credits for
first-time home buyers, before receiving another boost this spring, as
buyers rushed to beat the end-of-April expiration date for the extension
of the home buyer tax credits. The increase in housing starts also
stalled later in 2009 before showing some modest renewal during the past
several months. Still, the rates of sales and starts are far below
historical norms. Fundamentally, supply conditions continue to weigh on
real estate markets, and they could for some time as foreclosures add to
the overhang of unsold homes. But with the improving economy, low
mortgage rates, and more attractively priced homes, housing market
conditions will get better as we move further into the expansion.

What about labor markets? In general, many measures of economic
activity show improvement early in a recovery well before the jobs
picture starts to get better. This was especially true following the two
previous recessions. I am concerned that this may be the case during
this expansion as well. As the economy entered the most recent
recession, businesses quickly cut their work forces. And even as the
economy grew during the second half of 2009, job destruction outpaced
the extremely low levels of hiring.

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** Market News International Chicago Bureau: 708-784-1849 **

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