Chicago Fed president ‘less optimistic’ about inflation rising

Chicago Fed President and CEO Charles Evans cautions the Fed shouldn’t move too quickly on raising interest rates, citing sluggishly low inflation.

The Fed last month raised short-term interest rates, or federal funds rates, a move that Evans described as a “reasonably appropriate policy.”

Evans yesterday at a Wisconsin Bankers Association event in Madison predicted economic growth of at least 2 percent this year with unemployment dropping to about 4.3 percent.

And while Evans said the Fed is monitoring the economic downturn in China, which caused U.S. stocks to plunge again Thursday, he told reporters after his speech the U.S. economy’s fundamentals “continue to be strong.”

“I think fundamentals are still pretty good,” Evans said. “I haven’t seen anything yet that gets in the way of my forecast.”

Yet Evans said he’s “less optimistic” about inflation rising to the target than his colleagues on the Federal Open Market Committee, which makes monetary policy decisions.

That’s partly because inflation rates have been too low for too long, Evans said, which can make them more difficult to rise again if “this mindset becomes embedded in decisions regarding wages and prices.” Other key factors are lower energy prices and a strong dollar, which hurts manufacturing in the U.S. by raising export prices.

For years after the deep recession, the Fed kept rates close to 0 percent, but decided to raise them slightly to a range of 0.25 percent to 0.5 percent because of an improved economy. But Evans said while the unemployment rate has dropped significantly, the other side of the Fed’s mandate — inflation — continues to be lower than its 2 percent target.

“Prudent risk management calls for a slower removal of accommodative monetary policy,” Evans said. “From my perspective, the costs of raising the federal funds rate too quickly far exceeds the costs of removing accommodation too slowly.”

— By Polo Rocha
WisBusiness.com