Liftoff should be held until early 2016, Federal Reserve Bank of Chicago President Charles Evans said Monday.
"In my view, it likely will not be appropriate to begin raising the federal funds rate until sometime in early 2016," he said in a speech in Columbus, Ind., according to prepared text released by the Fed. "Economic activity appears to be on a solid, sustainable growth path, which, on its own, would support a rate hike soon. However, the weak first-quarter data do give me pause, and I would like to see confirmation that they are indeed a transitory aberration. Furthermore, and most important, inflation is low and is expected to remain low for some time."
The federal funds rate should not be raised until policymakers are confident inflation will hit the 2% target within two years, Evans said. "I see no compelling reason for us to be in a hurry to tighten financial conditions until then."
Evans noted despite many "false starts" and years of "tepid growth," the economy has increased solidly for the past two years, despite stalling in the first quarter of 2015. "The underlying fundamentals still look good," and the first quarter woes seem "transitory," Evans said in projecting GDP growth of 2.5% to 3% for the "next couple years."
Output growth and the labor market improved, and the unemployment rate has fallen to 5.5%. "This is terrific progress, but it remains somewhat higher than what a normal, sustainable unemployment rate should be." Evans said he believes the long-term unemployment rate should be 5.0%, on the low end of the 5% to 5.2% projected by Federal Open Market Committee members in their last summary of economic projections.
Additionally, Evans noted, other indicators seem to show more labor market slack than can be inferred from the jobless rate alone.
Evans said monetary policy played an important role in the growth of the economy.
Despite the improvement in the economy and labor markets, inflation remains quite low, and Evans said he expects "inflation to rise at a pretty gradual pace, reaching our 2 percent objective only in 2018. That's a pretty slow increase. Furthermore, there are downside risks to my projection."
The stronger dollar and lower oil prices are concerns to Evans. "If lower import and energy prices result in just a one-time drop in consumer prices, then they would not be an issue for monetary policymakers to worry about," he said. "But if the lower pricing gets embedded more persistently in the longer-run inflationary expectations of households and businesses, it would be even harder to get inflation back to its 2 percent target. This is not in my baseline forecast, but such a drop in inflation expectations is a downside risk that we need to be on the watch for."
Evans noted he wants to see "several important markers" before beginning monetary policy normalization. Among these markers are: continued labor market improvement and "solid GDP growth," with confidence the economy will return to full employment; also there must be certainty that inflation will "reach our goal of 2 percent on a sustainable basis within a year or two"; a pickup in the core PCE year-over-year index; and stronger growth in wages and labor compensation.
"I think we should be cautious in the timing of the first rate hike and our pace of policy normalization thereafter," Evans said. "My current view is that my economic outlook and my assessment of the balance of risks will evolve in such a way that I likely will not feel confident enough to begin to raise rates until early next year. But there is no prescribed timeline that must be adhered to, and no preset script to follow, other than that we should let economic conditions and risks to the outlook be our guides. Given uncomfortably low inflation and uncertainties about the economic environment, I see significant risks, but few benefits, 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."
