• History of low inflation undermining inflation expectations
  • Oil, dollar could further weaken inflation this year: Evans

Federal Reserve Bank of Chicago President Charles Evans said he’s less optimistic on inflation than his policy-making colleagues, making a case for why the U.S. central bank should take an especially cautious approach to raising interest rates in 2016.

“Given the persistently low inflation record of the past six years and given how slowly inflation evolves when it is at such low levels, it may be difficult to return inflation to target over the next two or three years,” Evans said Thursday. “I’m in favor of very gradual policy normalization to help ensure that we meet our inflation goal within a reasonable amount of time,” he said, according to the text of his speech in Madison, Wisconsin.

Evans’ remarks come three weeks after the Federal Open Market Committee raised interest rates for the first time in almost a decade, responding largely to progress made in the U.S. labor market. While unemployment has dropped to 5 percent, inflation has remained stubbornly low.

The Fed’s preferred measure for inflation was 0.4 percent in the 12 months through November, and 1.3 percent after stripping out volatile food and energy components. It has been below the Fed’s 2 percent goal for more than three years.

December FOMC

Minutes of the December FOMC meeting released Wednesday showed the debate among Fed officials focused primarily on whether they could count on inflation moving back toward the bank’s target. While the committee’s majority stuck by a forecast that inflation will rise to their goal by 2018, the minutes contained several warnings from a group of more dovish officials who did not share this confidence.

Evans, who doesn’t vote on policy decisions until next year, made clear Thursday he was among that minority.

“I am less optimistic about the inflation outlook than most of my colleagues,” he said, adding that “policy should plan to follow an even shallower path for the federal funds rate than currently envisioned by the median FOMC participant.”

The median forecast by Fed officials anticipates four quarter-point hikes this year.

Evans said the consensus inflation forecast could be upset by further drops in the price of oil or by additional appreciation of the dollar. It could also be threatened by deteriorating inflation expectations, he said.

“I find it troubling that the compensation for prospective inflation built into a number of financial market asset prices has drifted down considerably over the past two years,” he said.

Evans said he expects the U.S. economy to grow by 2 percent to 2.25 percent in 2016, with unemployment falling to about 4.75 percent by the year end.

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