SHANGHAI (MNI) – The U.S. Federal Reserve should keep its
accommodative monetary policies stance in place for the next three or
four meetings of its Open Market Committee, though it wouldn’t be
surprising for accommodation to be extended into next year, Chicago Fed
President and Chief Executive Office Charles Evans said Tuesday.

Evans was responding to a request at a briefing here to define his
“strongly” held position that “monetary policy is likely to be
accommodative for an extended period of time.”

“That would hold for the next three or four meetings which is about
six months,” he said. “Conditions warrant substantial accommodation
certainly until the end of this year but I would not be surprised if
they extended through to 2011.”

His position was supported by a benign inflation outlook, with
Evans noting “tremendous capacity and resource slack in the U.S. and
those inflationary pressures are not evident and, they’re coming,
they’re coming in the future.”

While the Fed’s current bias is supported by low inflation rates,
he said that the bank “faces the more medium-term challenge of when and
how to withdraw the accommodative policies that are currently in place.”

He did not provide any details on any potential timing or strategy
but did say that his notion of “maximum sustainable growth” would
require an unemployment rate of 5% and core inflation at 2%, versus the
current 1.5%.

While growth is expected to gain momentum by the second half of
this year, Evans said that he was cautious on the strength of the
recovery because of ongoing problems in the labor market.

“The largest challenge is that unemployment is very high and that
high, unacceptable unemployment will continue for a period of time,” he
said.

Despite his cautiousness, Evans said that “hopefully businesses
will be surprised by the strength of demand over the next year and begin
adding workers”

Evans said that the recession just passed is worse than that of the
early 1990s as those out of work find themselves waiting even longer to
be re-employed.

“An extremely unfortunate aspect of the current high unemployment
rate is that… the duration of unemployment is higher so if they don’t
find a job relatively quickly in the current recovery period, they’re
likely to spend more time in unemployment, challenging the prospect for
a more vibrant recovery,” he said.

The labor market won’t be helped by joblessness in the construction
industry either, he warned, as the housing market works through recent
excesses.

While fiscal stimulus will have less of an impact in the second
half of this year and the private sector should play a greater role,
Evans said that any hiring moves will be tentative.

“(Businesses) are right-sized for future economic activities
meaning that have they have quite a bit of capacity on hand,” he said.
“Businesses will be cautious to increase investment activities and hire
new workers.”

And the need to work through the excesses of the consumption binge
of recent years suggest more timid U.S. consumption levels going
forward, he warned, noting lost wealth from the stock and housing
markets.

“I don’t see them as the same source of stimulus as they were in
previous years,” he said.

“Any consumption patterns premised on higher average wage patterns
are going to be challenged. Consumption as a source of growth for the
U.S. economy is not going to be available in the same amount as it has
been in the past,” he said.

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