Grave business - my financial world

Federal Reserve Bank of Chicago President Charles Evans said officials can make clear their commitment to stable prices by “promptly'' reversing interest- rate cuts when “insurance'' against growth risks is no longer needed.

“When insurance proves to be no longer necessary, removing it promptly and recalibrating policy to appropriate levels will reiterate and reinforce our commitment'' to policy goals, Evans said in New York. “If we are transparent so that markets understand that we will adhere to this strategy, such insurance- based monetary policy will not encourage excessive risk-taking.''

Evans' comments reflect the assessment of some officials at the Jan. 29-30 meeting that once the economy recovers, the Fed may need to raise rates at a “rapid'' pace, according to minutes of the gathering. They follow expressions of concern by lawmakers this week to Fed Chairman Ben S. Bernanke that lower rates may start stoking inflation.

Focusing on the Fed's congressional mandate for stable prices and maximum employment will “minimize the potential for problems,'' Evans, who votes next year on the Federal Open Market Committee's rate decisions, said today.

In times of financial disruptions, “there may be risks of substantial spillovers that could lead to persistent declines in credit intermediation capacity or large declines in wealth,'' Evans said in remarks prepared for a panel discussion at a conference in New York.

Policy `Insurance'

“In such cases, policy may take out insurance against these adverse risks and move the policy rate more than the usual prescriptions'' of a rule created by Stanford University economist John Taylor, Evans said payday advances.

Evans, 50, the newest Fed bank president and the Chicago Fed's former research director, didn't make a direct reference to the current economic or interest-rate outlook.

Evans said signs of too much risk taking may include “imbalances'' that put the Fed's policy goals at risk. He cited stock-market gains in the late 1990s that threatened to spur inflation. The Fed probably can't identify or try to prick asset bubbles, Evans said, echoing prevailing views at the U.S. central bank.

“I am skeptical that we can identify bubbles with enough accuracy and know enough about how to act to say that we wouldn't have more failures than successes,'' Evans said.

Today's conference is hosted by the University of Chicago Graduate School of Business and Brandeis University's International Business School.

Other Fed officials spoke at the conference earlier today. Boston Fed President Eric Rosengren said lowering interest rates can “significantly'' aid the housing market, though it isn't a cure-all.

Fed Governor Frederic Mishkin said he's “suspicious'' of one study's estimates on the potential damage to economic growth from mortgage-credit losses.

St. Louis Fed President William Poole is also scheduled to speak in the session with Evans.

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