Evans says Fed plan allows hike before inflation averages 2%

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The U.S. central bank’s new guidance on interest rates doesn’t preclude tightening before inflation averages 2% for some period of time, Chicago Fed President Charles Evans said.

“We’ve sort of said we’re looking to get inflation up to 2%, and then after that, we could be raising rates and still have an accommodative setting of monetary policy,” Evans said Tuesday while answering questions during a virtual event hosted by the Official Monetary and Financial Institutions Forum.

“If you read the statement, that’s in the cards,” he said, referring to a communique the Fed published last week. “And so, we could start raising rates before we start averaging 2%. It’s still — we need to discuss that.”

The Bloomberg Dollar Index hit a fresh high on the day following his remarks.

Evans’s comments pointed to questions left unresolved by the guidance Fed Chair Jerome Powell and his colleagues issued last week at the conclusion of their latest policy meeting.

The central bank’s rate-setting committee said it would keep its benchmark rate where it is near zero “until labor-market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

The updated guidance took into account an earlier Fed announcement in August that it would begin to interpret its 2% inflation target as a goal to achieve on average over time. The Chicago Fed chief said additional decisions to be made on how that will relate to the timing of an eventual rate hike haven’t yet been debated.

“We do not have an explicit formula for, is there a clock, when do we start averaging, are we going to exactly average, or is it going to be a little bit more conceptual, and all that,” he said. “I think these are details yet to be discussed.”

JP Morgan Chase & Co. chief U.S. economist Michael Feroli said that Evans’ remark was “entirely consistent” with last week’s policy statement and was probably a reliable guide to wider thinking on the committee.

“Evans’ thinking usually has been fairly closely aligned with that of the Fed leadership, and we see his comments today as once again aligning himself with the direction set by the Chair,” he said in a note to clients. “The reaction to his remarks, however, indicates the degree to which Fed communications about the new framework and new guidance is a work in process.”

A low unemployment rate won’t constitute a trigger for rate increases in the coming years, Federal Reserve Bank of Richmond President Thomas Barkin said during a separate online event Tuesday.

“The committee said we will respond to shortfalls of employment from its maximum level,” he told the Greenville, South Carolina, Chamber of Commerce. “In the earlier version, we said we would respond to deviations of employment. In other words, a low level of unemployment alone would not lead to proactive increases in interest rates.”

Bloomberg News
Monetary policy Charles Evans Federal Reserve Bank of Chicago FOMC Thomas Barkin Federal Reserve Bank of Richmond