Evans Says Fed Rate Pause Appropriate After Bumpy 2016 Start

  • Fed's March dot plot is now a `pretty good setting': Evans
  • Need confidence inflation will get to Fed's 2% goal, he says

Federal Reserve Bank of Chicago President Charles Evans said two rate increases this year are “not at all unreasonable,” after the U.S. central bank kept policy on hold last week while officials assess if recent inflation gains are sustainable.

“The rationale for no rate change in March is that economic and financial risks seem somewhat higher for 2016 than we had hoped back last December when we first began raising rates,” Evans said Tuesday at an event in Chicago. “Most of the Federal Open Market Committee’s cautionary pause in the rate normalization path is about assessing risks and just being careful.”

Charles Evans
Charles Evans
Photographer: Price Chambers/Bloomberg

The FOMC kept the target range for the benchmark federal funds rate unchanged at 0.25 percent to 0.5 percent last week and halved projections for how many times it would hike rates this year from four times in December. Evans, who will vote on policy next year, said those estimates, also referred to as the dot plot, are “really a pretty good setting” for him and “a good reflection of what most people are thinking.”

Mainstream View

That was a change from last year, when his view on the appropriate pace of rate increases was more cautious than most policy makers, making Evans one of the Fed’s most dovish officials.

In quarterly estimates submitted for the March 15-16 FOMC meeting, nine policy makers predicted two rate hikes in 2016. Seven officials foresaw three or more increases this year, while one projected just one move. Evans said the identity of which policy maker picked which individual dot is confidential and isn’t even revealed inside the meetings.

The U.S. economy is projected to grow between 2 percent and 2.5 percent this year, with fundamentals “really quite good,” and unemployment should edge down further to around 4.75 percent, Evans said. At the same time, policy makers are looking for signs that inflation will rise in a “sustainable” way, he said.

Core PCE inflation accelerated to 1.7 percent in January, the fastest in three years. Yet, according to the Fed’s assessment, survey-based gauges of longer-run price growth remain close to historically low levels, and market-based measures of inflation compensation continue to be weak.

Fed Chair Janet Yellen urged caution last week in interpreting the latest data. She acknowledged the pickup in core inflation, which excludes energy and food prices, but also said “it remains to be seen if this firming will be sustained.”

Evans echoed her concern, saying “it’s not completely clear” that recent improvements in core inflation “are going to be sustainable increases.” He also pointed to seasonal effects in recent years that make it more difficult to judge the outlook.

“It has been a notable feature of the inflation data for the last several years that we start the year off with a bit of a higher burst of inflation relative to what we had in the second half of the previous years, and then when the second half of the year comes, it kind of comes down again,” he said. “So there’s some residual seasonality.”

His comments may offer some insight into why policy makers last week kept their estimates for core inflation unchanged at 1.6 percent for the final quarter of this year.

“The continuation of a wait-and-see monetary response is appropriate to ensure economic growth continues, labor markets strengthen further, wages begin to increase more, and all of this supports an eventual increase in currently low inflation, right back up to our 2 percent objective,” Evans said.

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