Evans Says Two Fed Rate Cuts Could Bring Inflation to Goal

(Bloomberg) -- The Federal Reserve should consider a couple of interest-rate cuts to boost inflation above the U.S. central bank’s 2% goal, Chicago Fed President Charles Evans said.

“Inflation is probably going to require a little more monetary accommodation in order to get up to 2, and above 2” percent, Evans said Friday during a talk in Chicago. “I really think that it would be useful, it ought to be a part of our policy, to be aiming for inflation a little bit above 2% at this point, because we’ve been under-running for so long.”

Investors are betting heavily that Fed officials will authorize a reduction in their benchmark overnight interest rate when they next gather in Washington on July 30-31. Fed Chairman Jerome Powell suggested to lawmakers in congressional testimony this week that the central bank has room to ease policy because inflation pressures remain muted despite a low unemployment rate.

The personal consumption expenditures price index, the Fed’s preferred gauge of inflation, rose 1.5% in May from a year ago and has rarely been above 2% in the last seven years.

“I think that with a couple of rate cuts, the trajectory for inflation could be looking like 2.2% PCE inflation in 2021, and that would be a perfectly acceptable, good outcome,” said Evans, who is one of the more dovish policy makers at the U.S. central bank and votes on monetary policy this year.

“On top of that, there is nervousness about the foreign economies -- beyond just their implications for inflation -- that I think a prudent risk-management approach would also say, yeah, that would be okay to make these adjustments," Evans said. “They are relatively minor. They are more in the nature of a recalibration.”

In December, Fed officials raised the federal funds rate to just under 2.5%, marking the ninth quarter-point increase in three years. At the time, they projected the so-called neutral interest rate -- which in theory would neither speed up nor slow down economic growth -- as being about 2.75%, according to the median estimate of Federal Open Market Committee officials.

Evans told reporters Friday after the talk that the December hike “was the right decision,” given what the committee knew at that time.

U.S. President Donald Trump has repeatedly criticized the move and called for rate cuts to unwind earlier tightening. The White House’s escalating conflicts over trade negotiations with China and other major trading partners have also raised concerns about global growth.

Quarterly projections published after the FOMC’s June meeting revealed that the committee’s median estimate of the neutral interest rate had fallen to 2.5% from 2.75%, implying that monetary policy may not be providing as much support to the economy as officials previously thought.

In the Fed’s long-run neutral rate estimates in January 2012, officials put the number at 4.25%. They have slowly revised it down over the course of the last seven years.

"Because inflation expectations seem to me to be anchored a little bit below a level consistent with our 2% objective, and it’s been stubborn like that, I think that tells me that our current setting for policy is a little bit on the restrictive side," Evans said. That chimed with a comment by Powell to senators on Thursday when he observed that “monetary policy hasn’t been as accommodative as we had thought.”

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Vince Golle

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