While refusing to suggest a date for liftoff, Federal Reserve Bank of Chicago President Charles Evans Friday said his views lean toward being extra patient and offering a more accommodative policy than his colleagues would like, and he’d be comfortable with a fed funds rate target under 1% at the end of next year.
“[R]egardless of the exact date for lift-off, I think it could well be appropriate for the funds rate to still be under one percent at the end of 2016,” Evans told the CFA Society Milwaukee, according to prepared text released by the Fed. “There is an important caveat, though, to my comment downplaying the importance of the exact date of lift-off. It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases.”
“Now I would like to emphasize that while I favor a somewhat later lift off than many of my colleagues, the precise timing for first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process,” he said.
Labor markets have improved, with unemployment at 5.1%, just two-tenths of a percentage point above the Fed’s median long-run projection. But Evans warned other labor market indicators suggest additional resource slack. Further improvement is expected in the coming three years, and the unemployment rate should trend slightly below its long-run sustainable rate. “So, although there are some risks, I am relatively confident that we will reach our employment goal within a reasonable period,” he said.
But, he said, “Inflation has been too low for too long,” leading him to believe the 2% inflation target won’t be met “within a reasonable time frame,” although he projects it to come close to 2% by the end of 2018, although most of his colleagues on the Federal Open Market Committee expect it a year earlier.
“Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher,” Evans said. “Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of 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.”
Among his reasons for patience, Evans said, accommodation should be sufficient to “generate a reasonable likelihood that inflation in the future would moderately exceed 2 percent.”
Credibility also remains a concern, with the Fed needing “to validate our claim that we aim to achieve our 2 percent inflation target in a symmetric fashion,” Evans noted.
Evans also wants to insure the Fed hasn’t “misjudged the strength of the economy or the upward tilt in inflation,” which would result in cutting rates to zero and perhaps use “unconventional policy tools.”
