Fed's Evans Says Low Inflation Readings Elevating His Concerns

(Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the risk that underlying inflation may be stuck below the central bank’s 2 percent target, plus the weakening of price measures over the past three months, raises strategic concerns for the U.S. central bank.

“Core inflation has retreated to relatively low levels over the past three months, elevating my concerns over the outlook for inflation,” Evans said Friday in Stockholm, according to the text of his prepared remarks. “Although some of this drop may be due to temporary special factors, we don’t want to be too dismissive of this development.”

Evans and his colleagues voted to leave the benchmark policy interest rate unchanged Wednesday and Chairman Jerome Powell pushed back against market expectations cuts, telling reporters “we don’t see a strong case for moving in either direction.” Meanwhile, inflation minus food and energy, according to the Fed’s preferred index, decelerated to 1.6 percent for the year ending March versus 2 percent in December.

Powell distinguished between price trends that might be temporary and those that would cause inflation to run “persistently below’’ the objective. He pointed to the Dallas Fed’s trimmed mean inflation index, which removes outlier prices on the high and low side. It stood at 2 percent in March.

Evans suggested the Fed should communicate its comfort with core inflation rates up to 2.5 percent “as long as there is no obvious upward momentum and the path back toward 2 percent can be well managed.”

“We should follow these words with actions and implement policies consistent with these communications,” he added.

The Fed is reviewing its approach to its 2 percent inflation target this year and the Chicago district bank will host an academic conference on the topic next month.

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