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Federal Reserve Bank of Chicago President Charles Evans said the drop in the unemployment rate to 8.5 percent may be partially reversed in coming months.

“I’m a little concerned that the most recent improvement is going to be transitory and it might move up above 8.5 percent,” Evans said in response to audience questions after a speech today in Carmel, Indiana.

Evans said he forecasts that “at the end of the year, we’re not going to be very different from 8.5 percent unemployment.”

Fed policy makers will discuss at their Jan. 24-25 meeting in Washington whether more steps are needed to bolster an expanding U.S. economy. Employers last year added 1.64 million workers, the best year for the American worker since 2006. Even with the gain, little headway has been made in recovering the 8.75 million jobs lost as a result of the recession that ended in June 2009.

The Labor Department said last week that the unemployment rate dropped to 8.5 percent, down from 8.7 percent in November, 8.9 percent in October and 9.4 percent in December 2010.

Speaking to reporters after his speech, Evans said he “can’t discount the possibility” that the “headwinds” facing the economy could cause growth to slow, as happened in the summer of 2010 and 2011.

Policies in Place
“I’d prefer to have accommodative policies in place to make sure we don’t have to do that again,” he said. “If we behave very aggressively, we could find improved economic performance one or two years faster than if we didn’t take those actions.”

Evans said that after seeing “reasonably decent growth” in the fourth quarter of 2011, the expansion could slow to a 2 percent to 2.5 percent pace, which would be too weak to lower unemployment. If people return to the labor force, that could cause unemployment to increase, he said.

The weakness in the economy means that “substantial” monetary stimulus is called for, he told reporters, and that $600 billion in purchases “would be quite a good place to start.”

Mortgage-backed securities “could be a perfectly fine choice for those asset purchases,” Evans said. “Mortgages might have a more direct effect on the economy.”

The Fed purchased $1.25 trillion in mortgage-backed securities in its first round of large-scale asset purchases, or quantitative easing. Including both rounds of asset purchases, the Fed purchased a total of $2.3 trillion in assets.

Too Early
The speech Evans gave to the Indiana Bankers Association was the same as one he delivered two days ago in Lake Forest, Illinois. Evans said that central bankers in the past have withdrawn stimulus too early, causing the economy to relapse.

“Such errors happened in 1937 when the Fed prematurely withdrew accommodation,” Evans said at a meeting of the Indiana Bankers Association. “More recently, the Bank of Japan made the same mistake. Therefore, it is essential that the Fed clearly commit to a policy action that is measurable against our goals.”