Evans Signals Europe's Crisis Will Delay Fed Rate Increase `A Little Bit'

Federal Reserve Bank of Chicago President Charles Evans indicated that the European sovereign debt crisis will prompt the U.S. central bank to delay raising interest rates.

Evans told reporters in Seoul today that he “wouldn’t be surprised” if the Fed’s policy of keeping rates low “gets extended just a little bit.” Philadelphia Fed President Charles Plosser, who is attending the same event, said separately that “how the crisis in Europe ends up affecting the economy will dictate how we will respond.”

Today’s comments underscore the attention global policy makers are paying to the potential consequences of the European crisis sparked by ballooning fiscal deficits from Greece to Spain and Portugal. In Asia, central banks from Australia to Indonesia and South Korea are projected to keep rates unchanged this week as they gauge the effect on the global recovery.

“The European situation adds uncertainty to the economic outlook,” Evans said at a press briefing while attending a conference hosted by the Bank of Korea. He said lower-than- expected demand for U.S. exports because of slower growth in Europe will “dampen the recovery a little bit.”

U.S. central bankers on April 28 kept the benchmark federal funds rate in a range of zero to 0.25 percent, where it has been since December 2008, and said “subdued” inflation and high unemployment are likely to keep rates “exceptionally low.”

Low Inflation

It’s appropriate to keep an accommodative monetary policy for now because inflation is “seriously under-running” price stability and unemployment is “very high,” said Evans, who along with Plosser isn’t a voting member of the Federal Open Market Committee this year.

“But, if the situation turns rapidly, if inflation expectations were to bounce back in a way that we weren’t expecting,” the Fed “will respond more quickly,” he added.

Plosser said he will “wait and see” how events in Europe might affect Fed policy. “It’s certainly true that there are things that could change the pace of our exit strategy, but I don’t see those happening as of yet,” he said.

Fed officials to date have indicated the damage to the U.S. economy’s expansion from Europe will be limited. Richmond Fed President Jeffrey Lacker said in a Bloomberg Television interview last week that the “most likely outcome” is shaving “a tenth or two off my growth forecast for this year.”

St. Louis Fed President James Bullard said in a May 26 speech in London that the European crisis “will probably fall short of becoming a worldwide recessionary shock.”

At the same time, evidence of rising stress in bank funding markets spurred the Fed to reopen currency-swap lines with central banks from the euro region, U.K., Canada, Switzerland and Japan this month.

Stall Recovery

“A deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Fed Governor Daniel Tarullo said May 20 in testimony to House Financial Services subcommittees, making the case for the restarting of the swaps.

Bank of Korea Governor Kim Choong Soo yesterday proposed an “institutionalization” of swaps to help establish a global safety net.

To contact the reporter on this story: Aki Ito in Seoul at aito16@bloomberg.net

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