Fed's Evans sees no rate hike until 'well into' 2015

The U.S. Federal Reserve will need to keep rates at rock bottom until late 2015, a top Fed official said on Friday.

Raising rates earlier, whether to head off the risk of financial instability or unacceptably high inflation, could dangerously depress already low inflation and derail a recovery that is finally gaining steam, Chicago Federal Reserve Bank President Charles Evans said in remarks prepared for delivery in Hong Kong.

"I currently expect that low inflation and still-high unemployment will mean that the short-term policy rate will remain near zero well into 2015," Evans said. "(B)y the time the policy rate increases, it will have been near zero for about seven years."

The Fed has kept rates near zero since December 2008 and bought trillions of dollars of long-term securities to push down unemployment, which rose as high as 10 per cent in the aftermath of the recession.

Now that the jobless rate has fallen to 6.7 per cent, the Fed has begun dialing down its massive bond-buying program.

Last week, policymakers said they would trim their monthly purchases to $55 billion from $65 billion, and reiterated plans that put them on track to wind down the program before the end of the year.

But the Fed has also said it will keep rates low for a "considerable time" after it ends the bond-buying, because despite the improvement, too many Americans who want to work remain out of a job.

Last week, Fed Chair Janet Yellen roiled financial markets by saying that after the Fed wraps up its bond-buying, likely by this fall, rate rises could come around six months later.

Evans on Friday made it clear he expects the Fed to need to keep rates low for much longer than that.

The U.S. economy grew at a 2.6 per cent pace in the fourth quarter, and despite a severe winter that slowed growth in early 2014, most economists and Fed officials expect the momentum to pick up in coming months.

But despite the improvement - in no small part due to help from Fed policies, Evans noted - inflation by the Fed's preferred gauge is just 1.1 per cent, well below the central bank's 2-per cent target.

Evans said there are no signs inflation is set to rise, as many had warned would happen if the Fed continues to pin rates at zero.

"If the Fed embarked prematurely on more restrictive monetary policy conditions, these adverse actions would work to reduce inflation to further unacceptably low levels," he said.

Nor should the Fed use a rate increase to combat the potential for "financial exuberance," Evans said.

Several Fed policymakers, notably the influential Fed Governor Jeremy Stein, have argued recently that monetary policy should be less accommodative when risks to financial stability are on the rise.

"I am not saying that financial stability concerns are not relevant for the economy or that policymakers should not take decisive action against developments that threaten financial stability," Evans said. "Rather, I am saying that the macroprudential tools available to policymakers are better-suited safeguards to addressing financial risks directly."

Copyright: Thomson Reuters 2014