Evans Pushes Go-Slow Tightening Pace as Next Fed Hike Looms

  • Chicago Fed chief says that unemployment can likely go lower
  • Evans wants to see core inflation moving up in sustained way

The U.S. economy probably isn’t at full employment and inflation remains below-target, Federal Reserve Bank of Chicago President Charles Evans said as he argued for keeping interest rates low until core inflation moves higher.

“Repairing damage incurred from the Great Recession continues to be critical for improving labor force quality for stronger, long-lasting growth,” Evans said, according to a text of his remarks prepared for delivering in Sydney on Tuesday. In this context, “incorrectly inferring that U.S. is at full employment; and prematurely tightening policy would carry particularly high social costs.”

Fed policy makers left their benchmark interest rate unchanged in September for their sixth straight meeting, though the decision came over the objection of three voters on the policy-setting Federal Open Market Committee who favored a hike. Fed Vice Chairman Stanley Fischer on Sunday called it a “close call.”

Evans said policy “may well be changing soon,” repeating an observation he made last week. Minutes of the Sept. 20-21 FOMC meeting will be released on Wednesday in Washington.

Speaking with reporters following the Sydney event, the Chicago Fed chief was asked whether next month’s U.S. election ruled out a rate increase before December.

“One move isn’t that big of a deal either way,” he said. “Even though I would like to wait and gather more information and have more confidence about inflation, I think one move would not seriously affect the continuing likelihood that inflation will move up. In that context, anything related to the election or other developments, I think it’s going to come down to how we view inflation and the progress of the labor market.”

The FOMC next meets in Washington on Nov. 1-2. The central bank started off the year projecting four rate increases but has since reduced its 2016 outlook to one rate hike, which investors and economists mostly expect in December.

Inflation Target

Evans, who does not vote on the policy-setting FOMC this year, argued the Fed ought to wait to see inflation moving closer to its 2 percent goal before raising rates in order to ensure it really achieves the target.

“I would prefer that at the time we make our next move, FOMC communications would also indicate that subsequent increases will be dependent on seeing further positive developments in inflation indicators,” Evans said. “I believe this would help assure the public that the Committee is seeking economic and financial conditions to support inflation attaining our 2 percent target sustainably, symmetrically and sooner rather than later.”

Evans also said that in a world where potential growth has slowed and the neutral rate of interest -- the one that neither stimulates nor slows the economy -- has moved lower, “we need to rethink our old policy benchmarks with this new calibration in mind.”

In Sydney, reporters again asked Evans about a rate increase at the end of the year. 

“A December move could be fine,” Evans said. “It depends on the ultimate strategy of whether or not we think, absolutely, beginning more renormalization is right. Sometimes I think we’d be well served if we were to wait a little bit longer and allow inflation to pick up more quickly.”

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