Fed's Evans: rates to stay low for some time

A top U.S. Federal Reserve official said on Tuesday high unemployment and low inflation justify holding benchmark interest rates ultra-low for quite some time but European debt woes are unlikely to derail the U.S. economic recovery.

We have a little bit more risk with the European situation; the (U.S.) outlook looks good but not so strong as to reduce the unemployment rate very quickly; I don't see inflationary pressures at the moment, Chicago Federal Reserve Bank President Charles Evans said.

So I think we will continue to have an accommodative policy stance for quite some time, Evans told business leaders in Chicago in response to an audience question.

Evans, who is not a voter on the Fed's policy-setting Federal Open Market Committee this year, reiterated that the Fed's pledge to keep rates low for an extended period means about six months to him.

Evans' comments reflect a division at the Fed, the U.S. central bank, over interest rate policies. With many economists believing the recession has been over for almost a year, some officials think the Fed should consider dropping its promise to hold rates at rock bottom levels for a long time, if not actually begin to raise borrowing costs.

However, the predominant view at the Fed is that with a relatively sluggish rebound and unemployment hovering just below 10 percent, and with some indicators of inflation at multi-decade lows, it is too early to start tightening credit conditions.

Evans said the economy is recovering, but growth is moderate and the jobless rate may remain stubbornly high, a view underscored by what he called disappointing jobs growth in May.

Europe's sovereign debt crisis is unlikely to deal a strong blow to the U.S. economic recovery, but the situation merits careful monitoring, Evans said.

Concern over escalating debt problems in some European countries, most recently Hungary, has roiled global markets for more than a month, boosting the dollar as investors seek safer assets, and clouding the outlook for European economic growth.

Stocks received a boost on Tuesday from Fed Chairman Ben Bernanke's comments late on Monday that the U.S. economy seemed to have enough momentum to avoid slipping back into recession, but worries about Europe limited gains.

Evans downplayed the impact of any slowdown in European growth on the United States, saying that the trade effects are likely to be limited because Europe accounts for just 15 percent of U.S. exports.

Nonetheless, if events in Europe evolve so that they have a more severe and broad impact on financial markets, then the scope of the problems for the U.S. could be magnified, he said.

The Fed last month opened dollar lending lines to the European Central Bank and other major central banks to head off potential stress in the international banking system from the crisis, but so far they have not been heavily tapped.

The Fed has kept short-term borrowing costs at near zero since December 2008.

Another Fed official who spoke on Tuesday, Governor Elizabeth Duke, said stronger consumer protections put in place after the financial crisis might dent bank profits. In comments at a banking conference in Hollywood, Florida, she did not discuss the outlook for interest rates or the economy.

(Reporting by James Kelleher, Writing by Ann Saphir, Kristina Cooke and Mark Felsenthal; Editing by Andrea Ricci)