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Fed's Evans : Rate Rises Still Possible If Economy Meets Expectations

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04/15/2019 | 01:15pm EDT

By Michael S. Derby

Federal Reserve Bank of Chicago leader Charles Evans said Monday the U.S. central bank should be willing to let inflation overshoot its 2% target, in comments that also indicate more rate increases remain a possibility.

While he said it wasn't what he expects to happen, "the Fed must be willing to embrace inflation modestly above 2% 50% of the time," Mr. Evans said in the text of a speech prepared for delivery before an economists group in New York.

"I would communicate comfort with core inflation rates of 2 1/2%, as long as there is no obvious upward momentum and the path back toward 2% can be well managed," he said.

Mr. Evans was addressing the Fed's inability to sustainably achieve its 2% inflation target. It hasn't been able to do so since the goal was adopted in 2012.

The Fed's target is supposed to view inflation above and below that point as equally unwanted. If a modest shortfall for an extended period isn't considered a crisis, then a small overshoot shouldn't be either, according to the way many at the Fed see the issue.

Mr. Evans is a voting member of the rate-setting Federal Open Market Committee. He spoke as the Fed has spent the year so far with its short-term rate target holding steady, as officials take stock of mixed economic data.

The Fed has indicated it isn't planning for any rate rises right now, and a dearth of inflationary pressures gives them space to hold things steady. So far, there is little sign price pressures are heating up.

Mr. Evans's speech shows the central banker maintains an optimistic outlook, albeit one in which he acknowledges negative risks to the economy outweigh positive ones.

"If growth runs close to or somewhat above its potential and inflation builds momentum, then some further rate increases may be appropriate over time to ensure that the economy settles in on its long-run sustainable growth path and that inflation runs symmetrically about our 2% target," he said.

But it also is possible that the Fed could go the opposite direction with rates, he indicated. "If activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold -- or perhaps even loosened -- to provide the appropriate accommodation to obtain our objectives," he said. "As we often say, policy will be data-dependent."

Still, Mr. Evans remains upbeat. "The economy's performance in 2018 was about as close to bliss as a central banker can imagine," and "we were pretty much living our goals" in terms of hitting the Fed's employment and inflation goals.

Mr. Evans said he sees U.S. economic growth hitting 1.75% to 2% this year. "We're not looking at bad numbers; still, the economy won't feel like it is doing very well compared with last year's very strong performance," he noted. "The fundamentals for growth in the U.S. remain good" and the job market should remain "healthy," Mr. Evans said.

"With appropriate monetary policy, I expect core inflation to remain consistent with our 2% objective in the near to medium term," Mr. Evans said.

Write to Michael S. Derby at michael.derby@wsj.com

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