Fed's Evans urges caution as ECB seeks return of animal spirits

(Bloomberg) – Federal Reserve and European Central Bank officials called for time to give their policies some breathing space, though ECB Vice President Vitor Constancio said a U.S. interest rate rise is just the signal the world economy needs.

Chicago Fed President Charles Evans said in a panel discussion in London on Monday that the U.S. central bank is “just being careful” by pausing in its campaign to raise rates, and that borrowing costs should increase later in the year if economic fundamentals remain sound. Constancio said he hopes Evans is right.

“That would be a very important proof that monetary policy can be very effective” in boosting demand and growth even when fiscal policy is lacking, he said on the same panel. “That will lift animal spirits everywhere.”

The ECB sees the U.S. economy as a source of both demand and global economic confidence as the Fed slowly tightens policy. At the same time, euro-area officials, who cut rates in March and expanded their bond-purchase program, intend to keep an ultra-loose stance to fight off the threat of deflation.

Wage Increases

The U.S. economy should grow at about 2.5 percent pace for the rest of this year and unemployment will likely fall to 4.75 percent, said Evans, who is not a voting member this year.

“The continuation of a wait-and-see monetary policy response is appropriate to ensure that economic growth continues, labor markets strengthen further, wages begin to increase more, and all of this supports an eventual increase in currently low inflation back up to our 2 percent objective,” Evans said.

The euro area has an unemployment rate of 10.2 percent and inflation was minus 0.2 percent last month. Economists surveyed by Bloomberg have predicted further monetary easing to come. Constancio said that while policy makers will do what they must to return consumer-price growth to the goal of just under 2 percent, “other actors” must do more to increase productivity, implement growth-friendly fiscal policies and complete the region’s banking and capital-markets union.