Fed Evans Links Rates Hike to Inflation Progress

The Federal Reserve may need to keep interest rates lower for longer to convince investors and the public that the central bank is serious about reaching its 2-percent inflation target, Chicago Federal Reserve Bank President Charles Evans suggested on Monday that, with inflation running very low both in the United States and globally, the Fed needs to show its commitment to achieving its inflation goal "sustainably, symmetrically, and sooner rather than later," Evans said in slides prepared for a speech in Chicago. Asked if any of his predicted three rate hikes by end 2017 will happen before the end of this year, Evans said “prognosticating is very challenging” when narrowing down expected rate hikes to particular months, but he didn’t exclude the upcoming November, December or January meetings for action.

In his view, monetary policy needs to demonstrate symmetry of inflation target. In this context, the pace of rate increases should be related to progress in achieving the inflation target. There also needs to be a risk management approach to monetary policy. There also needed to be a balanced approach to reducing deviations of inflation and employment from long-run objectives.

Evans was broadly optimistic surrounding the economic outlook with robust consumer spending while business spending was less soft.

The labor market was firm and there had been a recovery in average earnings. Significantly, the annual average wage growth of continually employed individuals had reached just above 4%, according to the latest data, which was in the 4-5% range and seen as consistent with a 2% inflation rate. This rate has climbed from lows just above 1.0% during the financial crash and the highest since 2008.

With no specific forecasts on rates, markets will still assume a majority of the FOMC will push for a December rate increase. Evans also did not rule out a rate increase in December and the dollar ticked higher with EUR/USD at 1.0875 from 1.0885 while Treasuries close to their lows for the day with no reaction in equity markets. He did not refer to any personally preferred pace of rate hikes in his prepared slides, and instead said he would like to see the pace of rate hikes tied to progress on inflation.

“Although the near-term outlook for economic growth is "relatively good," he said, slower labor force growth and other factors are capping the potential for faster expansion in the future, forcing the Fed to keep rates low to nurture what growth there is. So while short-term rates are only just above zero, monetary policy is not as accommodative as it might appear, and the Fed has less "headroom" to raise rates”, he said.

Inflation, as measured by the Fed’s favorite measure — the personal consumption expenditure index — has mostly been below the Fed’s 2% target since the global economic downturn. Monday is the last day before a weeklong communications blackout that Fed officials observe before each regular policy meeting. The Fed next meets Nov. 1-2. Traders and economists expect it to leave rates unchanged then, and to raise rates at the Fed's December meeting.