Europe’s Crisis May Delay Fed Rate Rise

Fed’s Evans Signals Europe’s Crisis May Delay Fed Rate Rise

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By Aki Ito

May 31 (Bloomberg) -- Federal Reserve Bank of ChicagoPresident Charles Evans indicated that the European sovereigndebt crisis will prompt the U.S. central bank to delay raisinginterest rates.

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

Today’s comments underscore the attention global policymakers are paying to the potential consequences of the Europeancrisis sparked by ballooning fiscal deficits from Greece toSpain and Portugal. In Asia, central banks from Australia toIndonesia and South Korea are projected to keep rates unchangedthis week as they gauge the effect on the global recovery.

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

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

Low Inflation

It’s appropriate to keep an accommodative monetary policyfor now because inflation is “seriously under-running” pricestability and unemployment is “very high,” said Evans, whoalong with Plosser isn’t a voting member of the Federal OpenMarket Committee this year.

“But, if the situation turns rapidly, if inflationexpectations were to bounce back in a way that we weren’texpecting,” the Fed “will respond more quickly,” he added.

Plosser said he will “wait and see” how events in Europemight affect Fed policy. “It’s certainly true that there arethings that could change the pace of our exit strategy, but Idon’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 FedPresident Jeffrey Lacker said in a Bloomberg Televisioninterview 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 26speech in London that the European crisis “will probably fallshort of becoming a worldwide recessionary shock.”

At the same time, evidence of rising stress in bank fundingmarkets spurred the Fed to reopen currency-swap lines withcentral banks from the euro region, U.K., Canada, Switzerlandand Japan this month.

Stall Recovery

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

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

To contact the reporter on this story:Aki Ito in Seoul at [e-mail]