Fed's Evans very worried about U.S. unemployment

The Federal Reserve's monetary policy is still appropriate because of high unemployment and minimal inflationary pressures in the United States, a Fed policymaker said on Tuesday.

Rates can stay low for an extended period and the Fed has various tools to prepare for higher interest rates once the economic recovery gathered momentum, Chicago Federal Reserve Bank President Charles Evans said.

I don't think that inflationary pressures are evident and the current level of interest rates is highly appropriate, he told reporters in Hong Kong at the end of a two-week visit to China.

Fed rates are effectively zero and the central bank has launched an emergency program of asset purchases aimed at keeping borrowing costs low and cushioning the housing sector.

I am very concerned about the state of the labor market at the present and even the current level of unemployment masks the problem of long-term unemployment increasing, Evans said.

Evans forecast the unemployment rate to be above 9 percent by the end of 2010, falling to around 8 percent by the end of 2011 and gradually toward 5 percent -- its long-term natural average.

Evans said the high unemployment rate was largely cyclical and should ease once the economic recovery spread but it would take much longer than hoped.

APPROPRIATE POLICY

He also said the economy was only growing slowly and that inflationary concerns were minimal given the weak job market.

The U.S. economy grew at a robust 5.9 percent in the last three months of 2009, fuelling recovery hopes and contributing to expectations the Fed may begin tightening.

But at its March meeting the U.S. central bank reiterated that it would keep rates extraordinarily low for longer.

Extended period is a guideline and not a hard and fast rule but frankly I expect accommodation to remain appropriate over the course of the year, said Evans who will not vote on the rate-setting panel this year.

Evans said once the recovery gathered momentum the Fed would prepare for higher interest rates by sterilizing the excess reserves by paying higher interest rates on them, and by selling assets.

I think that asset sales are likely to be later on in the process and not initially but we are actively discussing these issues and we will do so over a period of time, Evans said.

(Editing by Jan Dahinten)