By Michael S. Derby
Federal Reserve Bank of Chicago leader Charles Evans said Monday that while he still expects the Fed to raise rates amid a hopeful economic outlook, the door is open to rate cuts as well.
"I do have the expectation that towards the fall of 2020 we have one rate increase, and one more rate increase the following year," Mr. Evans said in an interview with The Wall Street Journal ahead of a speech before an economists' group in New York.
Right now, Fed policy, with a short-term rate target set at between 2.25% and 2.50%, is at "about neutral" in terms of its effect on the economy, and "that's a good place to be" because it gives the central bank options in an uncertain time, he said.
Mr. Evans said what happens with inflation is key for his monetary policy thinking. While he expects inflation to move back up toward the central bank's 2% target, failing to do that would change the outlook for rates.
When it comes to inflation, "anything that's sustainable that looks like it's moving downward, not upward, I would be extremely nervous about and I would definitely think about taking out insurance in that regard," Mr. Evans said.
"Inflation running too low is justification for deciding our setting for monetary policy is actually restrictive and we need to make an adjustment downwards in the funds rate. If we were facing 1.5% core inflation" that could make the case to lower short-term rates, Mr. Evans said in the interview.
Mr. Evans is a voting member of the rate-setting Federal Open Market Committee. The Fed has spent the year so far with its short-term rate target holding steady, as officials take stock of mixed economic data, and the policy maker has supported that stance.
The Fed has indicated it isn't planning for any rate rises right now, and a dearth of inflationary pressures gives it space to hold things steady. So far, there is little sign price pressures are heating up. The Fed's preferred inflation gauge, the personal-consumption-expenditures-price index, was up 1.4% in January from the same month a year ago. Core prices, which take out food and energy, were up 1.8% over the same time frame.
In Mr. Evans' speech, he said the U.S. central bank should be willing to let inflation overshoot its 2% target to compensate for running short of that goal. "The Fed must be willing to embrace inflation modestly above 2%, 50% of the time," he said.
"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's speech shows the central banker maintains an optimistic outlook, albeit one in which he acknowledges negative risks to the economy outweigh positive ones.
"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, he said.
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 said. "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 email@example.com