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Fed's Evans Indicates Fed May Cut Rates Further

Chicago Federal Reserve Bank President Charles Evans said that U.S. interest rates are "accommodative" and at the right level given a weak growth outlook, but then indicated that the Fed could still be open to cutting rates further.

"My judgment is that the current net stance of monetary policy is accommodative -- and this is appropriate in order to address the way we currently see the sluggish economy unfolding in 2008," Evans said at an economic forum at Harper College in Palatine, Illinois.

Charles Evans
Charles Evans

But in response to a question about when the Fed would start raising rates again, he said "There continue to be downside risks to economic growth...We're still muddling through this."

Though Evans isn't currently a voting member of the Fed's Open Market Committee, which sets interest rate policy, that comment reversed a rally by the dollar, which pushed oil prices back up toward $126 a barrel.

During his speech, Evans said that consumer spending, the backbone of the United States economy, is under pressure.

"Slower income growth, falling consumer sentiment, higher food and energy prices, lower housing and equity wealth, and tighter credit conditions are all restraining household spending," he said.

The Fed's string of interest rate cuts has brought rates to a level that "balances out substantial risks to the outlooks for both growth and inflation -- which I see as being to the downside for growth and to the upside for inflation," he said.

The Federal Open Market Committee lowered federal funds, its benchmark lending rate, to 2 percent in April, taking cumulative rate cuts since mid-September to 325 basis points.

At 2 percent, "the real fed funds rate is close to zero or perhaps slightly negative," said Evans, who is not a voting member of the FOMC this year.

Strains on liquidity in financial markets have provided a large "offset" to lower interest rates, making it more difficult for Fed policy to gain traction, Evans said.

"We think the disruptions today are more significant than in the early 1990s," when the United States faced another financial crisis from the savings and loan industry, he said.

Evans said U.S. growth should improve somewhat in the second half of 2008 given current interest rates and fiscal stimulus, but not regain a roughly "trend" rate of about 2.5 percent until 2009.

"We think conditions will improve in the second half of this year, but not enough to prevent economic activity from still running at a relatively sluggish pace," he said.

Core inflation, meanwhile, could retreat to the 1.5 to 2 percent seen by "most policy-makers" as consistent with price stability, by 2010, Evans said.

High commodity food and energy prices have so far not made their way into longer-term inflation expectations, but still could, he said, adding that "any increase in inflation expectations would pose an important risk to the achievement of price stability."

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