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Fed’s Evans Sees Rates Rising Above Neutral Level

Fed’s Evans Sees Rates Rising Above Neutral Level

The U.S. central bank will probably raise interest rates above levels it considers neutral for the economy next year given the outlook for inflation, Federal Reserve Bank of Chicago President Charles Evans said.

“Probably we are going beyond neutral,” Evans said Tuesday during a moderated discussion at an Economic Club of New York event.

“That’s my expectation, when I see that, taking out special factors, I’m still left with 3 to 3.5% inflation” by the end of 2022, he said. “That’s not what we want. If we’re at a 2.5% inflation rate, I think we have more things to ponder there.”

The Chicago Fed chief’s comments highlight how closely U.S. central bankers are keeping an eye on inflation data as they chart a course for interest rates after consumer prices rose 8.5% in the 12 months through March, which marked the fastest inflation rate in any one-year period since 1981.

Fed officials raised their benchmark rate by a quarter-percentage point last month after keeping it pinned near zero for the previous two years to help the U.S. economy recover from the impact of the pandemic. Now, they are signaling a relatively-rapid pace of rate increases over the rest of the year to get their benchmark rate to what they deem to be a “neutral” level of 2.25-2.5%, and are increasingly suggesting they may have to go even higher.

“By December, we’re going to get more data on the micro aspects of the high inflation, price increases, how much is it broadening out,” Evans said. “By that time, we’re at neutral, and to the extent we don’t see it coming down, we’re going beyond neutral, absolutely.”

Investors are betting Fed officials will choose to up-size rate increases at coming policy meetings, including at their next gathering May 3-4, opting for half-point moves instead of the more-typical quarter-point adjustments. St. Louis Fed President James Bullard, speaking Monday, said the central bank shouldn’t rule out even larger hikes, invoking the 75 basis point move that former Fed Chair Alan Greenspan delivered in 1994.

Evans, speaking with reporters Tuesday following the event, said half-point moves “could make sense” but added that he doesn’t “see the need for anything more than that, in terms of individual moves.”

©2022 Bloomberg L.P.