Evans Sees Very Shallow Fed Rate-Hike Path, Two Moves in 2016

  • Low inflation expectations may make it harder to hit 2% goal
  • Monetary-policy divergence will allow Fed to raise rates less

The U.S. economy will probably be strong enough to justify two interest-rate increases in 2016 as it advances despite headwinds from weaker growth abroad, said Federal Reserve Bank of Chicago President Charles Evans.

“A very shallow path -- such as the one envisioned by the median FOMC participant in March -- is the most appropriate path for policy normalization over the next three years,” Evans said in remarks prepared for delivery Wednesday in New York, referring to the policy-setting Federal Open Market Committee. He doesn’t vote on policy this year.

Nine of the 17-member FOMC projected at the conclusion of their meeting on March 16 that it would be appropriate to raise the benchmark federal funds rate twice this year, and Evans signaled that he was in that camp.

“My assessment is the economy is going to be strong enough, we’ll be raising rates two times this year,” Evans told CNBC in a television interview earlier on Wednesday. It “could well be more if we do better.”

Fed Chair Janet Yellen, in a speech to the Economic Club of New York Tuesday, said the uncertainty around the outlook for U.S. growth stemming from weakness abroad warranted the FOMC proceeding “cautiously.”

Evans said he expects the U.S. economy to grow between 2 percent and 2.5 percent in 2016, which would be enough to push the unemployment rate lower, and may lead to a rate increase when the FOMC gathers in June. The threshold for raising rates when the FOMC next meets in April is probably “pretty high,” he said on CNBC.

June FOMC

“I think moving in June would be on the basis of further improvements in the labor market like what we’ve had,” he said. “Further movement like that would be a good reason to sort of further adjust, gradually, this rate.”

In his speech, Evans added that he expects the unemployment rate to fall to between 4.5 and 4.75 percent by the end of the year, and that recent weakness in consumer spending should therefore “prove to be transitory.” However, risks to his outlook are “tilted to the downside,” he said.

On inflation, Evans said he was “a bit uneasy” about his forecast that U.S. inflation will return to the Fed’s 2 percent target.

Temporary Strength

“It is too early to tell whether the recent firmer readings in the inflation data will last or prove to be temporary volatility and reverse in coming months,” he said. “We saw this happen in 2012.”

Annual inflation as defined by the Fed’s preferred measure, the personal consumption expenditures price index, was 1 percent in February, according to data released Monday by the Commerce Department in Washington. The so-called core measure, which strips out food and energy prices, was 1.7 percent.

Evans said in the CNBC interview the Fed may have to allow inflation to overshoot in the short term to meet its target in the longer run.

“I don’t think we should be concerned about going through 2 on the way to making sure we get to 2 with high confidence,” he said. “Of course, we wouldn’t want it to get out of hand. I don’t think we’re looking at anything like that in the U.S., so I think we have the ability to be cautious.”

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