Monetary police is “accommodative and appropriately situated to address the substantial risks that remain both for sluggish economic activity as well as unwelcome inflationary pressures,” Federal Reserve Bank of Chicago president Charles Evans said yesterday.

Reiterating that there is a lag associated with rate cuts having an effect on the economy, Evans said: “It seems likely that credit conditions will also require adjustment time, as financial institutions reevaluate their portfolios and capital needs. As a result, the level of uncertainty regarding future developments continues to be high and the path forward may be uneven. We must keep this in mind as we evaluate the outlook.”

The economy will be better, but still sluggish in the second half of 2008, Evans told a Harper College Economic Forum in Illinois, according to prepared text of the speech released by the Fed. “We expect real GDP growth will return close to potential as we move through 2009,” he said.

Inflation should improve over the medium term, with 1.5% to 2% core inflation by 2010, as energy and commodity prices stabilize. “This forecast assumes that the resource slack being generated by the current weakness in the real economy will work to offset the cost pressures from higher energy and commodity prices,” Evans said.

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