Fed’s Evans floats idea of waiting until next summer to raise interest rates

Chicago Federal Reserve President Charles Evans said the case for a December interest-rate hike is not “obvious,” adding it may be wiser to delay any further increase in benchmark rates until next summer to see if inflation and the market’s expectations of higher prices perk up.

“Maybe it’s time to stop and see whether inflation expectations are going to move in line with our 2% objective. And if the judgment was that we’re still likely to be underrunning our 2% objective, maybe we would stop briefly and assess for more information, maybe wait until mid-2018,” Evans said in an interview with the New York Times.

The interview was conducted last week but released Tuesday afternoon, the paper said. Fed officials are in the midst of a so-called blackout period, where they refrain from public comment about interest rates in order to prepare for their policy meeting on Dec. 12-13.

The unemployment rate has fallen to a 17-year low of 4.1%, which seems to make the case for more rate hikes. But inflation has surprised Fed officials, including chairwoman Janet Yellen, by moving down this year.

Yellen and a majority of her colleagues on the central bank believe that low inflation is temporary and the Fed can go ahead with gradual rate hikes. A move in December would be the fourth quarter-point rate hike in the past year. Investors think a December rate hike is a done deal. Market odds of a quarter-point move have consistently been above 90% since the last Fed policy meeting in early November.

A few doves, like Evans, have argued the low inflation may be a signal of trouble ahead for the economy, such as weaker demand, and the Fed should go slow until it clears up. Inflation has been below the Fed’s target since 2012.

For his part, Evans frames the argument as a question of Fed credibility. The central bank must prove to the market that 2% isn’t a ceiling for inflation because, at some point in the next downturn in the economy, the Fed is going to need the market to believe the central bank can raise inflation higher than 2% to get the economy out of a slump, he said. This is the problem that the Bank of Japan has struggled with for decades, he noted.

“If we don’t live up to it this time, I think it’s even harder to get that message across and our tools would not be as effective,” he said.

The Chicago Fed president is a voting member of the Fed policy committee this year. His comments suggest he may the second dissenter at the meeting alongside Minneapolis Fed President Neel Kashkari, who has already signaled his opposition to another move next week.

Fed Gov. Jerome Powell, who is President Donald Trump’s pick to lead the Fed, and who has always voted with Yellen on rate policy, told Congress last week that the case for a rate hike in December was “coming together.”
Source: MarketWatch

Source.