Federal Reserve Bank of Chicago President Charles Evans repeated his call to hold interest rates near zero until early 2016 and raise them only gradually thereafter, because inflation is still too far below the Fed’s goal.
“My forecast does not see inflation rising to our 2 percent target until 2018 -- for me, that’s too far down the road given how long we have underrun our target,” Evans said in a speech Monday in Stockholm. ‘I likely will not feel confident enough to begin to raise rates until early next year.’’
The Fed has said it will raise its benchmark federal funds rate -- held near zero since December 2008 -- when it sees further labor-market gains and is “reasonably confident” inflation will rise back to its 2 percent goal over time.
To ensure the economy has enough momentum to decisively lift inflation, Evans argued the Fed should leave policy loose enough to allow the possibility that inflation could overshoot the target. This would help persuade the public that the Fed really is aiming for 2 percent.
“Symmetry is crucial,” he said. “We need the probability that inflation is above 2 percent to be the same as the probability it will be below 2 percent.”
Evans, a voting member of the policy-setting Federal Open Market Committee this year, said officials will decide on a meeting-by-meeting basis. He said while it’s possible a case for tightening could be made in June, depending on the data, his outlook means he’s in favor of the current level of stimulus continuing.
Case for June
“If the data from the committee standpoint indicates that it’s sufficient to have confidence in inflation going to move up and if we have confidence about the path of the economy we see through first-quarter softness, you could imagine a case being made for a rate increase in June,” he said. “My own projection is that it will take quite some time” for inflation to meet the target.
Most economists in a Bloomberg survey late last month predicted the central bank will start tightening in September.
The Fed’s preferred gauge of price pressures, based on personal consumption expenditures, rose by 0.3 percent in March from a year ago and has been under policy makers’ official target for 35 consecutive months.
“The way to avoid a loss of credibility about our symmetric target is to make sure we have enough accommodation in place to achieve our 2 percent objective in a timely manner,” Evans said.
U.S. growth slowed to 0.2 percent at an annualized pace in the first quarter from 2.2 percent the previous three months. Evans said “we weren’t expecting a pothole like that,” although he also argued the first quarter soft-spot appeared to partly reflect transitory factors.