MNI POLICY:Evans:Fast Re-Opening Risky, Weak Rebound Odds High

--No Reason to Raise Rates for Quite a Long Time

--Forward Guidance Not Needed; Markets Not Seeing Hikes

By Greg Quinn

     CHICAGO (MNI) - Chicago Fed President Charles Evans on Tuesday warned fast

re-openings of state economies carry big risks, and the odds of a weak U.S.

recovery rival his base case for a second-half rebound.

     "I hate to say this, but at this still early stage, the likelihood of the

baseline scenario may only be a bit higher than that of the more pessimistic

possibilities," Evans told reporters on a conference call. 

     His baseline scenario is for growth to return in the second half of the

year and unemployment to decline to around 5% next year. Even in that case "the

pickup in activity will likely be slow at first," he said.

     The Fed doesn't need to put out forward interest-rate guidance in a period

where the market doesn't expect an increase, Evans added. "I don't think that

there's going to be a reason for raising rates for quite a long time," he said.

"I'm hard pressed to see inflationary pressures now or anytime soon" especially

given the weakness before Covid-19, he said. 

     The Fed has cut interest rates to about zero and put USD6.7 trillion of

assets on its balance sheet to fend off what's likely the deepest economic slump

since the Great Depression. Chair Jerome Powell last week said that while he's

hopeful the economy can bounce back when health restrictions ease, he's more

worried about a permanent loss of worker skills and production capacity.

     The next payrolls report will likely show unemployment rising into

double-digit territory and data so far show major declines in consumer and

business spending, which can't snap all the way back because of extra costs

creating workspaces with social distancing, Evans said. Fed officials must hold

back on some thinking about monetary policy until it's clear where economy will

settle at, Evans said, and options could include forward guidance, yield curve

control and different asset purchases. 

     --RECOVERY MARKERS

     There will be many markers of whether the economy faces permanent damage,

but a strong one would be whether unemployment can return to around to 5% next

year, he said. 

     There are "pretty high risks" from early re-opening, Evans said, but they

will also tell policy makers a lot about the recovery's potential. 

     There will be some damage, especially as firms with low margins before the

health shutdowns face bankruptcy, Evans said. Fed programs to stabilize lending

markets are helpful, while the Fed faces legal limitations about loans and

taking losses without special authority, he said. Main Street loans will only

work if their design ensures wide take-up, he said.

     Interest rates will be lower for longer if the economy struggles to return

to normal, Evans said. The economy's re-opening will influenced by the potential

for new outbreaks and because industries like hotels will need much longer

before they can get back online. Asked if rates will be at zero for longer than

the last time, Evans referenced an eight-year spell and said "I don't expect

that" this time. 

     "Every business I spoke to is challenged," but they are responding with

innovations to make it work, Evans said.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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