A top Federal Reserve official said on Friday an erratic recovery dictates low rates for at least six months, while prominent economists said unsettled U.S. financial conditions are more of a drag on the economy than generally believed.
"I still think it's going to be an extended period of time that interest rates are going to be low," Chicago Federal Reserve Bank President Charles Evans told CNBC television.
"It's a time of still too much uncertainty. Consumers are being very careful with the labor market situation," he said.
The comments echoed those of Federal Reserve Chairman Ben Bernanke who this week told Congress a weak job market and low inflation were likely to warrant exceptionally low rates for some time.
Evans spoke on the margins of a University of Chicago Booth School of Business forum where a blue ribbon panel of economists proposed an updated financial conditions index to guide central banker decision-making. The index pays closer attention to variables affecting firms outside the traditional banking sector.
"The message here is that financial conditions are not as easy as the standard indicators suggest," said one of the economists, Deutsche Bank's Peter Hooper.
The Fed is depending on healing financial markets to help support recovery from a painful recession. Evidence of lingering financial malaise will make it harder for policy makers to budge from easy money policies any time soon.
A financial conditions framework would likely be useful when evaluating the economic outlook and the conduct of monetary policy, New York Federal Reserve Bank President William Dudley said, commenting on the proposal.
"Developments in the financial markets became very important in the conduct of monetary policy," he said.
Another top policy-maker, Minneapolis Fed Bank President Narayana Kocherlakota said different disruptions in financial conditions call for different responses by policy makers.
Central bankers might need to act differently in response to a drop in property values than they would if assets became less liquid, Kocherlakota said. No single financial conditions index can capture fluctuations among different types of strains, he argued.
Kocherlakota said currently credit constraints remain a source of financial shakiness.
The paper's authors said they paid greater attention to the issuance of asset backed securities, repurchase lending and total financial market capitalization than traditional gauges of financial conditions.
"The continued woes of the shadow banking system could continue to weigh on the pace of the recovery," the authors said.
The recovery of financial conditions since mid-2009 has fallen short of what would normally be expected with a rebound in economic growth, the authors said.
The Fed has begun to dismantle emergency lending programs established to help with lending during the financial crisis.
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