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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
[TOPICS: MMUFE$,M$U$$$,MT$$$$]
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com

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