Again noting his discomfort with a raise rates sooner rather than later policy, Federal Reserve Bank of Chicago President and Chief Executive Officer Charles L. Evans Wednesday said liftoff shouldn't start until there is certainty the economy will be able to thrive without accommodation.
He expects it to take two to three years for the Fed to get back to its policy goals.
"I am very uncomfortable with calls to raise our policy rate sooner than later," Evans repeated, according to prepared text of a speech in Wisconsin, released by the Fed. "I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals. And I think we should plan for our path of policy rate increases to be shallow in order to be sure that the economy's momentum is sustainable in the presence of less accommodative financial conditions. I look forward to the day when we can return to business-as-usual monetary policy, but that time has not yet arrived."
Evans said, "In my mind, current circumstances and a weighing of alternative risks mean that a balanced policy approach calls for being extraordinarily patient in reducing accommodation - that is, being patient about when we first increase the federal funds rate and being patient about setting the pace of rate increases once we have begun to move."
Downside risks, which Evans mentioned, include weak economies globally. But, the biggest risk is rushing back to "'business as usual' monetary policy," which would halt economic progress.
Having the Fed funds rate at zero lower bound "forced" the Fed to use "innovative, but controversial, unconventional monetary policies," which Evans called "extremely helpful," albeit the "second-best options."
Liftoff should be based on data, he noted. "Everyone will welcome a return to more normal times and a reliance on the traditional policy framework of adjustments to the federal funds rate," he said. "But the decision about when to begin to raise rates shouldn't be made prematurely. Rather, the decision for policy liftoff has to be made for the right reasons - that is, it should be dictated by economic conditions."
Further, Evans warned about using "historical norms" that are not "currently relevant" to determine how to meet the Fed's dual mandate. "Our experiences since the crisis began and current economic conditions are highly unusual."
Policy should not be set "mechanically," but rather "to achieve our ultimate goals as efficaciously as possible given current and prospective economic conditions, all the while with an eye on managing against important risks to the outlook."
The biggest threat to the economy "is prematurely engineering restrictive monetary conditions," he said. "In this scenario, the FOMC could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. If we were to presume prematurely that the U.S. economy has returned to a more business-as-usual position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment. Such an outcome could be a serious setback to the timely attainment of our dual mandate policy objectives."
Evans sees the economy improving over the next three years, provided the Federal Open Market Committee heeds his call for patience, with the unemployment rate falling and inflation "gradually" climbing to 2%.
Following several "false starts," Evans predicted 3% growth in real gross domestic product over the next year and half, with unemployment dropping "to a little over 5% by the end of 2016."
"These forecasts are predicated on maintaining a highly accommodative stance of monetary policy for a considerable time," he said.
"And once we start, at least initially, we should raise rates slowly to make sure the economy can weather less accommodative financial conditions. In sum, we should be exceptionally patient in adjusting the stance of U.S. monetary policy - even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives," Evans said.
