Federal Reserve Bank of Chicago President Charles Evans said weak inflation in the U.S. may not be entirely due to temporary factors.
Citing inflation expectations surveys, he said they make him “nervous” about some of the explanations for low price growth that focus on temporary factors. He’s previously expressed concern that those expectations are becoming entrenched among the public and this could make it harder for the Fed to get inflation back to target.
But, speaking at event in Zurich on Wednesday, Evans also said the U.S. economy is strong and noted the improvement in both global and European growth.
Given that backdrop, he said there’s “there’s room for a very honest discussion later this year as to whether or not it’s the right time to raise rates.”
“We’ve just announced in September that we’re going to adjust our balance sheet. That’s going to require a very modest amount of additional restrictiveness over some period of time,” Evans said. “I think that takes us to the next juncture, which is — you know — a gradual, patient approach to removing accommodation.”
Investors are betting Fed officials will press ahead with a third interest-rate hike in 2017 when they gather in December, following government data showing the U.S. unemployment rate fell last month to 4.2%, a 16-year low. The willingness to continue tightening policy would signal ongoing faith that a tighter labor market will eventually boost inflation back to their 2% goal despite an unexpected slowdown this year.
A measure of consumer price inflation preferred by the U.S. central bank, which strips out food and energy components, declined to 1.3% in the 12 months through August, from 1.9% in January. The drop has led to a widening debate about whether the so-called Phillips curve relationship that links inflation to unemployment, which has guided policy makers for decades, can still be relied upon to predict price pressures.
