Inflation will slowly move toward the Federal Reserve's 2% target, and for the first time in a long time, risks to growth are more on the upside, Federal Reserve Bank of Chicago President Charles Evans said Wednesday.
"The environment for setting monetary policy has improved considerably," Evans said in text prepared for delivery at a conference in Frankfurt, Germany. "For the first time in quite a while, I see more notable upside risks to growth. And though I still have concerns, I see inflation gradually moving up to target."
Progress toward the dual mandate "justifies" the two latest rate hikes, he said, and his outlook is "roughly consistent with the median" projections. Evans said he would "support another one or two increases this year."
Despite the positive news, he said, "I still worry about revisiting the zero lower bound and having to resort to unconventional monetary policies."
"To be clear, my modal expectation is that the fed funds rate will evolve roughly in line with the median [Summary of Economic Projections] path. So, I expect monetary policy watching will recede into a more boring spectator sport over the next couple of years. Having taken over the helm of the Chicago Fed in 2007 — great timing — I am eagerly looking forward to this."
While consumer spending has grown solidly, business investment has disappointed. "There are understandable reasons for this: The rising value of the dollar has weighed on U.S. firms with an international presence, and low and variable oil prices have held back energy exploration and drilling," Evans said. "Nonetheless, even after accounting for these factors, recent capital spending has still been weak. Fortunately, recent indicators are pointing to some recovery in expenditures. And business optimism generally has increased of late, which could further boost capital spending."
In the coming years, he said, he sees gross domestic product "moderately above potential"; unemployment below the natural rate, and "inflation gradually moving up to our 2% symmetric target."
Although international and domestic "developments posed important downside risks to the U.S. outlook," remaining downside risks "don't seem as intense as they once did."
But, now there are "notable upside growth scenarios." Evans noted, "Growth in both advanced and emerging market economies picked up in the second half of 2016, and foreign economic prospects are looking better than they have for some time. In the U.S., there are many fiscal proposals before Congress. The precise details of any final legislation remain unclear, so it's difficult to evaluate their potential implications. However, the general thinking is that such policies could boost growth for a time."
Comparing tightening to previous cycles, Evans said the current one "is a far more gradual path."
Even if core inflation goes above 2%, even as high as 2.5%, for a while it would be "consistent with our symmetric inflation objective. Indeed, the best way to assuredly get to 2% inflation is to do it faster and with momentum. So I believe that a policy path that allows for some possibility of such an inflation outcome is a reasonably acceptable risk to take."
