UPDATE 1-Fed's Evans: U.S. rates right for boosting growth

Wed May 14, 2008 1:00am BST

(Adds details from speech on growth outlook, inflation)

CHICAGO May 13 (Reuters) - The U.S. economy will remain sluggish in the months ahead, but "accommodative" interest rates will help it pick up later this year and in 2009, Chicago Federal Reserve Bank President Charles Evans said on Tuesday.

Evans, in remarks for delivery at the annual Chicago reception of finance group ACCION, said tight credit conditions and the ongoing housing slump would continue to restrict consumer spending "for some time" and hold the economy to a "relatively sluggish" pace of expansion.

But "even given the financial turmoil, the stance of monetary policy is accommodative and supportive of growth," he said, adding he expects growth to improve in the second half of the year and return to near potential in 2009.

The United States grew at a slight 0.6 percent rate in the first three months of this year, matching its performance in the fourth quarter of 2007.

To boost the economy, the Fed embarked on an aggressive easing campaign last September, when its benchmark interest rate stood at 5.25 percent. The last reduction in April took the rate down to 2 percent, its lowest level since late 2004.

Evans warned that it would take time for credit conditions to ease and for the Fed's 325 basis points of interest rate cuts to influence economic activity.

"As a result, the level of uncertainty regarding future developments continues to be high and the path forward may be uneven," he said. "We must keep this in mind as we evaluate the outlook."

A copy of his remarks was made available in advance of his speech.

INFLATION TO EASE, BUT UPSIDE RISKS REMAIN

Core inflation, which removes food and energy costs, is likely to ease to a 1.5 percent to 2 percent range by 2010, Evans said.

Earlier on Tuesday, some of his colleagues voiced growing concerns about inflation, perhaps signaling that the Fed will refrain from cutting its target federal funds rate again in the near term.

San Francisco Fed President Janet Yellen said in a separate speech on Tuesday that interest rates would have to be raised in a timely manner as growth recovers.

While Evans said he expects high energy and other commodity prices to stabilize over the medium term, he added that "any increase in inflation expectations would pose an important risk to the achievement of price stability."

Oil has set a series of record highs in recent weeks, last trading above $125 a barrel. That has made life difficult for the Fed, which must somehow manage to prevent the economy from falling into a recession at a time of rising global prices.

Some economists have worried that a steady slide in the value of the dollar could worsen the inflation outlook.

But Evans noted that the weak dollar, down about 20 percent against a basket of major currencies since 2006, has boosted U.S. exports, making it "one bright spot" for the struggling U.S. economy.

Evans is not a voting member of the policy-setting Federal Open Market Committee in 2008. (Reporting by Steven C. Johnson and Karen Pierog; Editing by Leslie Adler)