CHICAGO (Reuters) - The U.S. economy is on a firmer footing after a deep and lengthy recession, but still-high unemployment is keeping inflation under wraps and continues to warrant ongoing support from the Federal Reserve's ultra-easy money policy, a top Fed official said on Thursday.
The U.S. central bank will watch inflation and inflation expectations closely, Chicago Fed President Charles Evans said in remarks prepared for delivery to the AFP Global Corporate Treasurers Forum, "and we will adjust policy if developments move our forecast to rates incompatible with our inflation mandate."
But Evans said he expects moderate economic growth to trim the unemployment rate, which was 9 percent in April, only slowly, and inflation to crest this year at between 2 percent and 2.5 percent before returning to below the Fed's informal 2 percent target.
New information, such as stronger-than-expected GDP growth or evidence that wage pressures are boosting inflation, could force a reassessment of policy, he said.
"Contemplating such adjustments in advance will help prepare us for the eventual time when a change in the stance of monetary policy will be necessary," Evans said. "Despite recent improvements to the outlook, we are not yet at that point."
The Fed, which has kept interest rates near zero for two and a half years and bought more than $2 trillion in long-term securities to lower borrowing costs further, is nearing the end of its most recent round of bond-buying.
A sharp rise in oil, wheat, and other commodity prices earlier this year sparked worries that inflationary expectations could take hold, but most Fed officials, including Fed Chairman Ben Bernanke, said they expected the rise to be transitory.
That view appears to have been vindicated by a recent pullback in commodity prices, as well as data released last week showing the pace of food and fuel price rises slowed in April.
U.S. consumer prices rose to a 2-1/2-year high of 3.2 percent in the 12 months to April, though core inflation was only 1.3 percent. Evans on Thursday said he does not expect headline inflation to run above core inflation for very long, and called it a mistake to point to higher prices in any one good, such as gas, and conclude that inflation is rising.
Bernanke said after the Fed's most recent policy meeting that he is in no hurry to raise rates anytime soon, and Thursday's comments from Evans, regarded as one of the central bank's most reliable doves, are in line with that sentiment.
Evans said he believes that continued resource slack will put downward pressure on inflation, limiting the effect of the surge in oil prices.
(Reporting by Ann Saphir, Editing by Chizu Nomiyama)