Evans Says Fed Needs to Generate Stronger Inflation Overshoot

(Bloomberg) -- The U.S. central bank needs to keep monetary policy easy to raise the public’s inflation expectations even after the current bout of inflationary pressures from supply-chain disruptions fades, Federal Reserve Bank of Chicago President Charles Evans said.

“I do not think the supply-side-induced transitory surge in inflation we are seeing today will be enough to do the trick,” Evans said Monday in remarks prepared for a speech at the annual National Association for Business Economics conference in Arlington, Virginia. “I expect that we will need a period of sustained, monetary-policy-induced overshooting of 2% inflation to boost long-run inflation expectations enough to deliver on our mandated goals.”

Evans spoke following last week’s Federal Open Market Committee meeting, which concluded Wednesday with a signal from Fed officials that they would probably soon begin winding down the massive bond-buying program they put in place last year in response to the pandemic. 

The Chicago Fed chief, a voter on FOMC decisions this year, echoed that guidance in his remarks.

At the same time, Evans described the outlook for the Fed’s benchmark interest rate -- which the central bank has held near zero since March 2020 -- “much less clear.” 

Quarterly projections published following the FOMC meeting last week showed the committee was evenly split in seeing a need to begin raising rates as soon as next year, amid expectations that inflation would drift back down to just above the Fed’s 2% target, from current levels above 4%.

Evans cited low longer-term Treasury yields as an indication that the public is still too pessimistic about the outlook for inflation, suggesting the Fed needs to aim higher.

“Though the modest overshooting projected from 2022 through 2024 is an improvement, I don’t think it is a strong signal of sustainable inflation above 2%,” he said, referring to the FOMC projections. “I feel we need to go beyond trying to thread the needle by a couple of tenths in order to be assured of a sustainable moderate overshoot.”

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