By Jonathan Spicer
BOSTON, April 13 (Reuters) - Two dovish Federal Reserve policymakers on Saturday highlighted the U.S. central bank's good record keeping inflation close to target, arguing the Fed needs to stay focused on accommodative policies despite some outsized fears over future inflation.
Chicago Fed President Charles Evans and Narayana Kocherlakota of the Minneapolis Fed, speaking at a forum on how best to heal the troubled U.S. labor market, in effect sought to push back against more hawkish-minded officials who want to wind down the Fed's extraordinarily easy monetary policies.
Evans said inflation pressures look low now, and the Fed's easy policies have helped slowly move the unemployment rate down toward 5.5 percent, which he called a sustainable level.
U.S. joblessness stood at 7.6 percent last month, down from 10 percent in 2009. The Fed's preferred inflation measure is around 1.3 percent, below its 2 percent target.
"Without signs of actual inflation, many inflation-risk discussions ultimately raise this specter of ... unlocking the long-ago-vanquished inflation demons from the dungeon," said Evans, a voting member of the Fed's policy committee this year.
"We have to monitor it, we have to be mindful, but I don't think we should obsess over it," he said, adding the Fed's inflation performance has been "really good."
"Chairman Bernanke will go down as one of the best Fed chairs for many many reasons, but also because the inflation performance has been good."
NOT HIGHER BUT LOWER POLICY THRESHOLDS
The Fed is buying $85 billion in Treasury and mortgage securities per month and has promised to keep interest rates near zero for a long while more to support the stop-start U.S. economic recovery and get Americans back to work.
While policy doves currently hold sway over Chairman Ben Bernanke and the majority of Fed policymakers, minutes from last month's policy meeting suggest the quantitative easing program could draw to a close by year end, earlier than some economists had expected.
Like-minded and speaking alongside Evans, Kocherlakota argued that a balanced policy approach would allow inflation to deviate somewhat from its 2-percent inflation goal in order to lower U.S. unemployment.
"A balanced approach would allow for deviations of inflation from its longer run goal in order to facilitate a faster decline in unemployment back to its desired level," Kocherlakota said.
Kocherlakota is alone in advocating for even more accommodation from the Fed in the form of lowering to 5.5 percent, from 6.5 percent currently, the "threshold" at which the central bank will consider raising rates from near zero.
On Saturday, he told reporters that while it would be ok to lower the threshold, it would be "very confusing for the public" if the Fed were to raise that threshold.
"I would strongly advise against doing this," he said, because the Fed has said it will keep rates low until that point. But, he added, it hasn't said "anything about what could do after that, which allows for the possibility that we could always lower the threshold."
As the downward trending channel in the EURUSD continues to take shape, the pair looks poised for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 201 low around 1.2640-50, and the bearish sentiment surrounding the Euro may gather pace over the next 24-hours of trading should the German unemployment report dampen the fundamental outlook for Europe’s largest economy. However, we may see the EURUSD consolidate ahead of the ECB interest rate decision scheduled for April 4 as market participants weigh the outlook for monetary policy, and we may see a relief rally in the euro-dollar should the central bank increase its pledge to save the Euro. How To Trade This Event Risk Expectations for a further improvement in Germany’s labor market casts a bullish outlook for the single currency, and a positive print may pave the way for a long Euro trade as it dampens bets for an ECB rate cut. Therefore, if unemployment slips 2K or greater in March, we will need to see a green, five-minute candle following the release to establish a buy entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits. In contrast, the ongoing slack in the real economy may continue to drag on job growth as businesses keep a cap on production, and the report may highlight a weakening outlook for the region as the euro-area remains mired in a recession. As a result, if the report disappoints, we will implement the same strategy for a short euro-dollar trade as the long position mentioned above, just in the opposite direction. Impact that the change in German Unemployment has had on EUR during the last month Pips Change (1 Hour post event ) Pips Change (End of Day post event) February 2013German Unemployment Change 
Unemployment in Europe’s largest economy slipped another 3K during February after contracting a revised 14K the month prior, while the jobless rate held steady at an annualized 6.9% following an upward revision in last month’s reading. Indeed, the Euro tracked lower following the uptick in the jobless rate, with the EURUSD threatening the 1.3100 region, and the single currency tracked lower throughout the North American trade as the pair ended the day at 1.3056. --- Written by David Song, Currency Analyst To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong To be added to David's e-mail distribution list, please follow this link. New to FX? Watch this Video Questions? Comments? Join us in the DailyFX Forum Click Here to Download the DailyFX News Notifier 