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Chicago Fed's Evans: Need to see better housing market

By Andrew Stern

LAKE FOREST, Illinois (Reuters) - The president of the Chicago Federal Reserve Bank said on Wednesday that a more vibrant housing market will be necessary to boost home prices and provide a lift to the overall economy.

Answering questions after addressing a Rotary Club meeting in Lake Forest, Illinois, Evans also said the U.S. central bank's dual mandate of promoting employment and keeping inflation contained could be beneficial with an inflation target of 2 percent.

The target could be shifted in "reasonable fashion" to suit circumstances, he added, offering a 3 percent inflation rate as a plausible level as long as it was well understood that the Fed's ultimate target rate was lower.

Earlier, Evans described the recovery as "painstakingly slow" and said the Fed needs to keep its super-easy monetary policy in place to reduce high unemployment.

Evans cited the moribund housing market as a drag on the economy, a situation that needed "improvement."

The Fed recently suggested that the government-run housing agencies Fannie Mae and Freddie Mac be empowered to boost mortgage lending.

"We need a situation where houses can be sold and get the market moving up again," Evans said.

"MORE ACCOMMODATION" AN OPTION

Evans, speaking to reporters afterward, did not rule out a third round of asset purchases by the Fed if the current accommodative policy proves inadequate to boost economic growth.

Firstly, the Fed needed to "state clearly" that the fed funds rate should remain near zero.

"If that's not enough, then do more accommodation," he said, adding it would be "helpful" if Congress and the president could agree on fiscal policy and perhaps offer another round of economic stimulus.

Evans said his objective was to have the Fed maintain a loose monetary policy for the foreseeable future until the unemployment rate dips below 7 percent, unless the long-term inflation outlook worsens. The unemployment rate is currently at 8.5 percent.

"(Monetary easing) would be dependent on when the unemployment rate finally falls below 7 percent. But if that causes trouble and inflation were to pick up, I'd be willing to tolerate, on the high end of our inflation behavior, I would say, 3 percent would be a reasonable position," Evans said.

"Until the three-year-ahead inflation outlook is 3 percent, I would maintain that policy. From the analysis I've seen, I don't think we'd ever get anything like that, but it's something to be concerned about," he said.

Monetary policy had its limits, Evans said, noting some economists believe there is structural weakness in the economy, perhaps because of mismatched skill sets in the labor force. He said there have been changes in the relationship between workers and employers, such that what were described as temporary layoffs can be permanent, which slows any rebounds in employment.

Such a "dismal" economic outlook could persist for years, and was reminiscent of the 1930s, he said.

In response to an audience question about the risks of the European debt crisis, Evans said the Fed is carefully monitoring U.S. banks' exposure to euro holdings but is not unduly worried.

"We have looked carefully at the banking system. It's important to know what their exposures are," he said.

"We seem reasonably comfortable how that's playing out," he said, noting money market funds had reduced their exposure to the euro. However, the moves to cut exposure simultaneously worsened the debt problem for countries like Italy, by raising its borrowing costs.

"We're hopeful that Europeans will deal with the situation very carefully," he said, adding that the euro has been "a benefit" for the global economy.

(Reporting by Andrew Stern; Editing by Jan Paschal)

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