Fed Officials Upbeat On U.S. Recovery

Two senior Federal Reserve officials were upbeat Monday about the U.S. economic recovery despite the worsening debt crisis in Europe, but gave no indication the Fed is anywhere near raising interest rates.
By: In-Soo Nam and William Mallard: wsj.com
“Right now, the prospects for continued growth in the U.S. remain relatively solid,” Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, told a news conference during a Bank of Korea seminar in Seoul.
“I hope, I anticipate at this point that the U.S. won’t have a double-dip recession.” He added that the European crisis “raises some clouds on the horizon” and that the Fed would have to “be cautious” in response.

Charles Evans, president of the Chicago Fed, said the U.S. recovery is “well under way” but still-low inflation means the central bank should keep rates very low “for an extended period,” in line with its official policy statement.

“Inflation is severely under-running price stability, so it’s still appropriate to keep an accommodative policy,” Mr. Evans told a separate news conference at the Seoul event. “But if the situation turns rapidly, policy will need to respond more quickly.”

A few weeks ago, many analysts expected the Fed to begin raising interest rates by the end of 2010. As the situation in Europe worsened in May, those expectations have been put off and now many analysts don’t expect the Fed to move until 2011.

Mr. Evans said the European crisis would likely damp U.S. exports to a small degree but that for now it wasn’t likely to have a big impact or change the outlook for Fed policy.

Fed Chairman Ben Bernanke, addressing the Seoul conference by video, said the world’s central banks will exit their economic-stimulus policies at different times, weighing local factors as they seek to be neither hasty nor tardy in tightening, U.S. Federal Reserve Chairman Ben Bernanke said.

“Because economic conditions vary, the appropriate timing of the exit is likely to differ across countries,” Bernanke said. “To guide these important decisions, each central bank will have to carefully monitor economic developments in its own jurisdiction.”

Mr. Plosser and Mr. Evans both cited recent improvement in the U.S. labor market as promising signs for the broader recovery and predicted the improvements will continue. Mr. Plosser said many people may be surprised by how fast employment bounces back, while Mr. Evans said that if inflation expectations should surge, the Fed would need to respond quickly–shifting its current emphasis on promoting growth.

Mr. Evans, asked about the outlook for the Fed to sell back some of the massive amount of mortgage-backed securities it has bought in a bid to provide liquidity to the financial system, said he expects this would come after the Fed unwinds other emergency measures.