By Steven K. Beckner

CHICAGO (MNI) – Chicago Federal Reserve Bank President Charles
Evans indicated Thursday that he can see no justification for tightening
monetary policy this year unless his forecast of unemployment and
inflation were to change.

Given his belief that unemployment will still be unacceptably high
and inflation receding by year’s end, Evans said he would still be in
favor of an accommodative monetary policy as he talked to reporters
following a speech to the AFP Global Corporate Treasurers Forum.

He had said earlier told the group that “substantial accommodation”
remains “appropriate” given the “significant” slack in the economy and
the likelihood that inflation will fall from recent more elevated
levels.

But Evans reiterated that he is prepared to change his view in
favor of earlier tightening under certain circumstances.

When the time comes, he said he would favor initially halting the
reinvestment of proceeds of maturing securities, then draining reserves,
then raising official short-term interest rates.

Fellow FOMC voter Narayana Kocherlakota, the Minneapolis Fed
president, has called for raising the federal funds rate by 50 basis
point by year’s end if his own forecast holds true. And minutes of the
April 26-27 FOMC meeting say that “a few” participants thought rate
hikes might be needed later in the year.

But Evans took a different position when asked whether he could
foresee the need to tighten before the end of the year.

“My own expectation based on the path of my forecast that
unemployment will continue to be well higher than the sustainable
rate (and) that inflation pressures will be transitory on
headline and underlying inflation well less than 2%. In that
environment I’m still going to be looking for an accommodative
policy,” he said.

But Evans added that he will be “on guard for things changing
rapidly.”

In particular, he said that “if (he) saw bank lending really take
off … , if excess reserves were really loaned out and put to work” in
a way that could “drive up prices” he “would associate that with a
strong economy” and would “be happy” to change his mind and support
earlier tightening.

But Evans made clear that is not his expectation. He called recent
slower economic data “sobering” in light of last year’s unexpected slump
that led the FOMC to resume quantitative easing and said that it remains
appropriate to keep rates “extremely low for an extended period” to guard
against a repeat of that experience.

He doubted the first quarter slump will continue, though, calling
it likely a “transitory hiccup.”

Even when the Fed stops buying longer term Treasury securities at
the end of June, he said “the liquidity we put in place will still be in
place” and “we will still have lot of accommodation in place.”

The FOMC minutes said a majority of members favored the eventual
adoption of a “corridor”? rate scheme in which the discount would be the
ceiling, the IOER the floor and the funds rate in the middle.

Evans indicated he remains agnostic. He said he is “still studying”
that idea, but said that “for the foreseeable future…we will have a
balance sheet larger than anything that
can lead to a corridor system” and so “we’ll have to live with a floor
system until we get much further out…There’s still time to think
about it.”

Evans said “the first step” in tightening should probably be to
“start redeeming assets that are maturing.” But before taking more
active steps to shrink the balance sheet, he said the Fed should
first raise the IOER and in turn the funds rate.

He added that he “would tend to drain reserves so
pressure on the funds rate would be closer to (the top end of the
0-25 basis point target) than near zero.”

The exact timing will depend on the economy, he said.

In response to earlier audience questions, Evans said he “would
like ultimately to get back to an appropriate size balance sheet
consistent with a funds rate that’s positive.”

He said financial conditions are “greatly improved” and that bank
lending has increased, especially for large firms, but said smaller
companies are still having trouble getting credit.

Evans acknowledged that some Fed officials are “concerned
that exuberance is coming back a little too quickly” in asset prices,
but said he is not inclined to “second guess” “well-functioning
markets.”

Asked about the weakness of the dollar, Evans said it can boost
import prices and in turn inflation, but said the dollar has shown
strength as a safe haven in times of crisis.

** Market News International Chicago **

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