The U.S. recession should end in the second half of 2009, but the Federal Reserve needs clearer signs of sustainable growth to start reversing course on policy, Chicago Fed president Charles Evans said on Wednesday.

We expect modest increases in output in the second half of this year followed by somewhat stronger growth in 2010, Evans said in remarks prepared for a speech to business leaders in South Bend, Indiana.

Evans is a voting member of the Federal Open Market Committee in 2009.

In the absence of unexpected shocks and changes, I don't foresee the need for any major changes to the policy parameters of the programs, and I view us in a wait-and-see mode, he said.

Evans does not anticipate a flare-up of inflation over the short-run, given weak labor markets and low capacity utilization.

I think the downward forces on inflation will be greater than the upward forces, and we could see some declines in core inflation. But over the medium term I see the risks to the inflation forecast as being more balanced, he said.

Evans acknowledged that the sharp run-up in the Fed's balance sheets could create worries that inflation will rise, but said there is no middle link in the chain in the past that has lead from credit expansion to inflation.

Inflationary pressures will not arise without broader credit expansion, and there is no evidence for that at present, he said.

(Reporting by Ros Krasny; Editing by Padraic Cassidy)

Inflation