Regional fed chief sees economic rebound -- but not immediately

Chicago's top federal bank official said Monday he sees hopeful signs for the local economy by early next year.

But it was the short-term that he and many of the 200 or so regional business leaders in his audience had on their minds.

Charles L. Evans, Chicago's Federal Reserve Bank president, told a gathering of nearly 200 area business leaders at Harper College that the combination of $4-a-gallon gas and more expensive grain, milk and meat remains an albatross on the economy. But in spite of that, he expressed hope of a rebound as early as next year.

"(Gas and food prices) are definite headwinds holding back the economy," he said in a breakfast speech sponsored by the Daily Herald.

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As a Federal Reserve Bank president, Evans helps determine federal monetary policy that can significantly influence the cost of loans and foreign exchange rates. The bank is viewed as one of the government's strongest influences on the market's so-called invisible hand.

In recent months, the bank has aggressively slashed interest rates charged to banks to offset the housing market fallout, which led to tighter restrictions on loans and a dearth in easy credit that once kept the nation's economy pumping.

Recently, rising oil and food prices have sparked renewed fears of rapid inflation -- a prospect that evokes visions of the 1970s "stagflation" that wrecked the job market and standard of living for many Americans as gas prices skyrocketed.

Business leaders attending the event were clearly worried about the country's short-term economic direction for just those reasons.

"A lot of us have these same concerns," said Jack Lloyd, Harris's regional president of community banking in the Northwest suburbs.

Evans said that because of the weak economy, many businesses are forced to eat the extra costs of gas and food. He also pointed out productivity is on the rise, helping to offset the problem.

Thomas MacCarthy, chairman and CEO of Cornerstone National Bank and Trust in Palatine, said he has seen many suburban businesses take a hit on their profits instead of passing on the cost to strapped customers.

"You have to figure out how to be efficient or you have to reduce your margins," he said. "Right now, most are reducing their margins."

Evans, of Glen Ellyn, laid out a positive path for the economy, forecasting a return to stability next year as the housing market bottoms out and the stranglehold on lending loosens.

This, he said, would reverse the downward trend of the national gross domestic product, often used as a key barometer of the nation's economic health. It has been skimming near zero growth since late 2007. Two quarters of negative growth is deemed an economic recession.

"We expect real GDP growth will return close to potential as we move through 2009," he said.

Yet, the near future of the economy remains negative, he said, labeling the next six months chiefly "sluggish."

On the other hand, Evans was buoyant about the potential impact of economic stimulus checks arriving in the mail over the next few weeks. The payouts were approved by Congress in early spring and are now dropping $600 per person and $300 per child into bank accounts.

Most of the money may not get spent on retail goods but go to pay down debt and make up for rising gas and food prices, Evans said. Regardless, he insisted it will prove to be an overall benefit for the economy.

"Because of that, we are expecting growth to be much better than it would be otherwise," said Evans, who was appointed to the federal bank in September of last year.

Meanwhile, Evans did acknowledge concerns about inflation and said it could become a bigger issue in the coming months. When inflation fears spread, the federal bank can raise interest rates to help dampen the impact.

"Inflation pressures are higher than most of us would prefer," Evans told reporters following the presentation.