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Fed's Evans Says U.S. Recovery Uncertain as Housing Not `Out of the Woods'

Federal Reserve Bank of Chicago President Charles Evans said that while the housing market and U.S. economy have shown signs of improvement, recovery isn’t yet assured.

“Although there are some signs of general economic recovery and some evidence of home-price stabilization, we are certainly not out of the woods,” Evans said today in a speech in Indianapolis. The recovery “seems to be extremely modest” and the central bank’s “accommodative policy is appropriate,” he said in reply to an audience question.

The Fed, aiming to invigorate a slowing recovery, decided Aug. 10 to keep its portfolio of bonds at $2.05 trillion by reinvesting maturing mortgage-backed securities. Unemployment will probably fall next year to the “low eights,” Evans said. The jobless rate last month was 9.5 percent.

“I am increasingly uncomfortable with the lack of noticeable improvement in the labor market,” Evans told reporters after the speech, adding that he supports the central bank’s decision to set a floor on its bond holdings. He predicted “a very modest recovery,” saying “I am probably marking down my 2010 forecast.”

The Commerce Department will report on Aug. 27 that the U.S. economy is growing more slowly than previously thought, expanding at a 1.4 percent pace in the second quarter, according to a Bloomberg News survey of economists. The Commerce Department’s initial estimate for the second quarter, released last month, said the economy was growing at a 2.4 percent pace.

Photographer: Jin Lee/Bloomberg

Federal Reserve Bank of Chicago President Charles Evans said, “Job loss and unemployment are now causing more defaults than imprudent lending.” Close

Federal Reserve Bank of Chicago President Charles Evans said, “Job loss and... Read More

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Photographer: Jin Lee/Bloomberg

Federal Reserve Bank of Chicago President Charles Evans said, “Job loss and unemployment are now causing more defaults than imprudent lending.”

Stocks Fall

The Standard & Poor’s 500 Index fell 1 percent to 1,056.23 at 11:08 a.m. in New York, while the yield on the 10-year Treasury note fell 8 basis points to 2.51 percent.

Evans said that, while he doesn’t see a relapse into a recession as likely, the weak recovery is especially vulnerable to unexpected shocks.

“Whenever you’ve got a recovery that is at this stage and it’s very modest, if you were to get hit by a negative shock that could end up with a faltering economy,” Evans told reporters. “That is not my expectation. My expectation is that the recovery will continue.”

Fed Chairman Ben S. Bernanke plans to speak Aug. 27 in Jackson Hole, Wyoming, on the economic outlook and the central bank’s policy response.

Evans said he will probably support more Fed accommodation “if we became more unsure of the sustainability of the recovery. If we thought the recovery wasn’t going to achieve escape velocity, that would be a concern.”

At Zero

The Chicago Fed reported yesterday that its national activity index, which draws on 85 economic indicators, was at zero in July after a reading of minus 0.7 in June. A reading below zero indicates below-average growth in the U.S. economy.

In housing, “projections suggest foreclosed units could reach as high as 3 million in 2010 with over a million lender repossessions,” Evans said at a community breakfast for the Indianapolis Neighborhood Housing Partnership. “Job loss and unemployment are now causing more defaults than imprudent lending,” he said.

Sales of U.S. previously owned homes slumped more than forecast in July and the number of unsold houses swelled, evidence the market is depressed by foreclosures and limited job growth.

Purchases of existing homes plunged 27.2 percent to a 3.83 million annual rate, figures from the National Association of Realtors showed today in Washington. The pace compares with the median forecast of a 4.65 million rate, according to a Bloomberg survey.

“Inflation is under-running my objective of 2 percent sustainable inflation,” Evans said.

Evans, 52, joined the Chicago Fed as an economist in 1991 and became president in September 2007. He votes every other year on the interest-rate setting Federal Open Market Committee. He next votes in January 2011.

To contact the reporter on this story: Joshua Zumbrun in Indianapolis at jzumbrun@bloomberg.net.

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