Fed officials say need firm recovery before hike

New York Federal Reserve Bank President William Dudley and Chicago Federal Reserve Bank President Charles Evans said continued credit problems and a high rate of unemployment are constraints on the U.S. economic recovery..

I think that we are going to be waiting for the economy to improve in a strongly sustainable fashion and until that happens, then it's unlikely that we would be changing policy, Chicago Federal Reserve Bank President Charles Evans told reporters after a speech to a business group.

The Fed has slashed rates to near zero and pumped over $1 trillion into the financial system to prevent banking failures and pull the economy out of the worst recession in decades. It has pledged to keep rates ultra-low for a long time to nurture the recovery.

I certainly need to see an economy that's vigorous enough to bring the unemployment rate down, number one. Dudley told PBS' Nightly Business Report when asked what he would need to see before he would feel comfortable voting for a rate hike. The president of the New York Fed has a permanent voting seat on the Fed's policy-setting panel.

And, as long as inflation's well behaved then I'm going to be pretty patient on the other side, Dudley said.

Evans, who is not a voter on the Fed's policy-setting panel this year, also said policymakers would have to see convincing signs of healing in labor markets, where the jobless rate has been stuck at 10 percent, before tinkering with policy.

We will need to see employment improve and unemployment to come down with some momentum in order to feel better about recalibrating, Evans said.

Steps to withdraw the Fed's extraordinary support for the economy, including raising rates or withdrawing liquidity from the system, are unlikely any time soon, Evans said.

Officially our extended period language indicates that's some substantial number of meetings, I've said at least three, four meetings away, he said.

The Fed's next policy meeting is January 26-27, and it is not expected to make changes to rates or its promise to keep borrowing costs at rock-bottom levels for an extended period.

Dudley said the extended period language means different things to different people. But, he said, what I want to stress is extended means at least six months. It could be a year from now.. two years from now. It's going to depend on how the economy develops.

The comments from Evans and Dudley, seen in the middle ground between the U.S. central bank's anti-inflation hawks and pro-growth doves, suggest the central bank is in no rush to move toward raising interest rates.

The U.S. economy cut 85,000 jobs in December and the U.S. unemployment rate stayed stubbornly high at 10 percent. Dudley said he expects jobs growth within a few months and definitely expects the economy to start adding jobs this year. However, he said, it is not clear whether that will be enough to bring down the unemployment rate materially.

A few Fed officials have suggested continuing or expanding mortgage-backed securities purchases past their scheduled completion at the end of March to nurture a weak recovery and prevent potential disruptions to housing markets.

Dudley, however, said it would seem prudent for the Fed to stick to its plan to end the Fed's mortgage-backed securities purchase program in March as the economy is starting to improve.

Dudley said the impact on mortgage rates from the ending of the purchase program would likely only lead to a little bit of upward pressure on rates. But if mortgage rates were to rise a lot, leading to a significant deterioration in the economy, the Fed could always decide to step back in and buy more, he said.

Evans, speaking in Coralville, Iowa, said tight credit and cautious businesses and households are likely to restrain economic recovery and keep the jobless rate at high levels in 2010.

But there is also a chance the return to economic health could be surprisingly robust, he said.

The recovery could exceed these expectations, Evans said. Some of the recent data have been a good deal better than expected.

(Reporting by Kristina Cooke and Ann Saphir, additional reporting by Mark Felsenthal; Editing by Andrew Hay)