Evans Says Fed Shouldn’t Rush Rate Rise as Inflation Undershoots

The U.S. central bank shouldn’t rush to raise borrowing costs even as the economy and job market improve because inflation may stay under target for several years, Federal Reserve Bank of Chicago President Charles Evans said.

“I don’t think we should be in a hurry to increase interest rates,” Evans said during a discussion with Lars Peter Hansen, a Nobel prize-winning economist at the University of Chicago. Later in the presentation Evans said such a move to tighten too soon would be a “catastrophe.”

Evans echoed the sentiment of the Federal Open Market Committee, the policy-setting panel on which he’s a voting member this year. Last month the FOMC said it would take a “patient” approach to raising rates and indicated the decision would depend on incoming economic data.

At last month’s meeting, most members thought that guidance “indicated that the committee was unlikely to begin the normalization process for at least the next couple of meetings,” according to minutes of the Dec. 16-17 gathering released today in Washington.

Evans today said he’s optimistic about the U.S. economic outlook, predicting growth this year of 2.6 percent and a labor market that keeps producing 200,000 or more jobs a month. Still, he said he didn’t see the Fed achieving its 2 percent inflation target for three to four years.

Speaking to reporters after the forum, Evans said the Fed will need to carefully monitor falling oil prices and their implication on inflation, and that housing hasn’t shown the strength he wants to see. Wage growth consistent with the Fed reaching its objective for inflation would be 3.5 percent to 4 percent, he said.

Inflation Concern

The minutes showed some Fed officials last month expressed concern about the outlook for inflation, which has remained below the central bank’s target for 31 straight months.

“A number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the committee’s commitment to that objective,” according to the minutes.

The Fed’s preferred measure of inflation, the personal consumption expenditures price index, rose 1.2 percent in the year through November. The core index, which strips out volatile food and energy costs, rose 1.4 percent.

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