Fed should not raise rates to fight financial risk: Evans

Fri Oct 18, 2013 4:16pm EDT
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By Ann Saphir

CHICAGO (Reuters) - The Federal Reserve should be "extraordinarily careful" about hiking interest rates to head off potential risks to financial stability when more effective tools, like supervision, are available, a top Fed policymaker argued on Friday.

Chicago Fed President Charles Evans said raising rates to tamp down risk-taking, when what the economy needs is support from low interest rates, is a "poor choice."

"If more restrictive monetary policies were pursued to generate higher interest rates, they would likely result in higher unemployment and a sharp decline in asset prices, choking the moderate recovery," Evans told the Financial Management Association's annual meeting. "Such an adverse economic outcome is unlikely to set a favorable foundation for financial stability."

In an effort to pull the economy from its worst downturn in decades, the Fed has kept short-term interest rates near zero since December 2008 and is buying $85 billion in Treasuries and housing-backed securities each month to lower long-term borrowing costs as well.

Low rates are aimed at encouraging investment and hiring, and Evans, one of ten current voters on Fed policy this year, has been an ardent supporter of the policies.

On Friday he said that he had been open to paring bond purchases last month, but had been "persuaded" by his colleagues that it would be better to wait.

Since then, he told reporters, "I haven't seen anything like what I thought it would take in order to get us to a ‘yes' on tapering."

But some Fed officials are worried about whether easy policies are fueling unseen asset bubbles, and have cited financial stability concerns as one reason the Fed should pare its bond-buying program.   Continued...

Chicago Federal Reserve Bank President Charles Evans speaks during the Sasin Bangkok Forum in this July 9, 2012 file photo. REUTERS/Sukree Sukplang/Files