"There is no prescribed timeline that must be adhered to and no pre-set script to follow other than that we should let economic conditions and risks to the outlook be our guides," Evans told the Lake Forest-Lake Bluff Rotary Club, according to prepared text released by the Fed. "Given uncomfortably low inflation and an uncertain global environment, there are few benefits and significant risks to increasing interest rates prematurely. Let's be confident that we will achieve both dual mandate goals within a reasonable period of time before taking actions that could undermine the very progress we seek."
While economic growth and the labor markets have shown dramatic improvement in the past two years, inflation, and its outlook, remain a concern for Evans. "Current core inflation is about 1.3 percent, and my forecast has it rising to 2 percent only by the end of 2018. So, I am anticipating it to rise at a woefully gradual pace. Furthermore, there are downside risks to my projection."
Specifically, he mentioned the recent drop in oil prices and the appreciation of the dollar, which lowers import prices, as deflationary. "If lower energy and import prices resulted in just a one-time drop in consumer prices, then they wouldn't be an issue for monetary policymakers to worry about. But if the lower pricing gets embedded more persistently in underlying trends, it is problematic - especially if ultimately it lowers longer-run inflationary expectations of households and businesses. This could make it even harder to get inflation back to our 2 percent target."
Since low inflation is affecting most advanced economies, it creates downside risk for the growth outlook in the U.S., Evans noted.
The summary of economic projections indicates most Federal Open Market participants expect a rate hike this year, with a median for the target federal funds just over 1% at the end of 2015 and above 2% at the end of 2016.
Since the FOMC meets eight times a year, "the projected path is consistent with a 25 basis point increase at every other FOMC meeting. I should note that this is a considerably slower, more gradual pace of rate increases than those implemented in 2004 through 2006 - the last time the Fed normalized policy following an extended period of very low interest rates."
Of course, Evans noted, the financial market expect slower hikes, with the funds rate target at 1% at the end of next year.
Personally, Evans repeated his belief the Fed should hold off on rate hikes until 2016. While the economy "appears to be on a solid, sustainable growth path," inflation remains low. "Accordingly, in my view, a prudent risk-management and goal-oriented approach to monetary policy dictates that we continue to assess low inflationary condition for some time before generating more restrictive financial conditions."
Evans said he fears learning "we have misjudged the strength of the economy" after a rate hike or a surprise disinflationary shock that forces the Fed to return to zero lower bound after the first rate hike. "Or if we were too timid to reverse ourselves back to the zero lower bound, we would persist with overly restrict conditions," he said.
Conversely, waiting too long to raise rates will cause inflation. "I simply do not see high costs to this scenario. Given how far inflation is from our target, some greater-than-expected pickup in inflation would actually be welcome."
Before raising rates, Evans said, he would "need to be confident enough that we will achieve our dual mandate goals within an acceptable period of time and that we are at low risk of regressing back to economic conditions that necessitate policy rates returning to their zero lower bound."
The "markers of progress" Evans is looking for include employment market improvement and GDP growth continuing "and we must be confident that growth will not stall before getting there."
Also, Evans wants to have confidence that inflation will rise and reach the 2% goal within a year or two. Specifically, he mentioned, an increase in year-over-year rate of change in the price index for core PCE.
Wages and labor compensation rates need to rise. The final signal Evans seeks is "I need more evidence that the public and financial markets expect that inflation will be rising over the medium term in line with our 2 percent objective."
