Noting that his liftoff would come later than most of his colleagues, Federal Reserve Bank of Chicago President and Chief Executive Officer Charles L. Evans said Tuesday, he's more interested in the "trajectory" of rates after liftoff than when the first rate hike occurs, and he believes a fed funds rate under 1% at the end of 2016 could be appropriate.
"[W]hen thinking about the initial stages of normalization, I find it useful to focus on where I think the federal funds rate ought to be at the end of next year," Evans said according to prepared text of a speech released by the Fed. "And right now, given my economic outlook and assessment of risks, regardless of the exact date for liftoff, I think it could well be appropriate for the funds rate to still be under 1 percent at the end of 2016."
And while he believes he should go into Federal Open Market Committee meetings open minded, he said, "I admit to some nervousness about our upcoming decision. Before raising rates, I would prefer to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation would bolster my confidence. I am concerned, however, that it could be well into next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation."
While inflation remains a problem, employment is close to the Fed's target, he said, although he sees "additional resource slack" not seen in the unemployment data. "I don't think we're quite there yet, but we have made good progress toward meeting our employment mandate."
He doesn't expect inflation to come near the 2% level until the end of 2018 because of downside risks, including slow growth in emerging economies, including China; and inflation surveys either steady or with expectations that "have ticked down in the past year and a half."
Using the summary of economic projections, the assumption is a 25 basis point increase in the fed funds rate at every other meeting for three years.
"There is a crucial caveat, though, to my comment downplaying the importance of the exact date of liftoff. To me, it is vital that when we first raise rates, the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Evans said. "If we do not, then market participants might construe an early liftoff as a signal that the Committee is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives. I would view this as an important policy error."
