Inflation is likely to rise above 2% given the strong economy, but price pressures are “not a problem” that would require the U.S. central bank to accelerate the gradual pace of interest-rate hikes, said Charles Evans, the president of the Chicago Fed, on Thursday.
“It wouldn’t surprise us if [inflation] gets above 2% a little bit. That is nothing to be worried about,” Evans said in a meeting with reporters at his bank’s headquarters.
He added that it “makes sense” that inflation has risen, given the strong economy and developments on the energy front.
“Inflation moving up to, say, 2.25% would not be troubling at all, and even 2.5% as long as that is expected not to accelerate, could well be consistent with symmetry of our 2% objective,” Evans said.
Evans is referring to the Fed’s position that its 2% inflation target is “symmetric” meaning that a deviation of inflation to the upside would not elicit a policy response, as prices grew at far less than 2% without drawing central bank action.
Evans said he is open minded to risks that the economy could overheat but added that his judgement at the moment is that those fears are “not quite what is relevant.”
The Chicago Fed president was upbeat on the economy.
“It is a very good period of time for the economy,” he said. He said it felt like the economy was benefitting from tailwinds and not being slowed down by headwinds.
Evans forecast GDP growth of 3% this year and 2.5% in 2019. This should bring the unemployment rate down to 3.5% from 3.9% in July.
Given this forecast, Evans said he saw the need to keep gradually raising interest rates towards a neutral level, in other words, a rate neither stimulating or restricting growth.
Evans said his bank’s economic team puts that neutral rate around 2.75%. This is above the current level of rates. In June, the Fed hiked interest rates to a range between 1.75% and 2%.
Evans said his forecast of tame inflation meant that the Fed might have to move rates up into a slightly restrictive level of rates perhaps as soon as next year or in 2020.
The funds rate might have to rise only 50 basis points above neutral, he suggested
“We don’t have to win the war on inflation over again because we did that in a very difficult costly and arduous fashion in the eighties and into the nineties,” Evans said.
On the other hand, if wages picked up and firms got more pricing power than now expected “that would call for more aggressive adjustments of the funds rate,” he said.
Evans, who is not a voting member of the Fed interest-rate committee, had been one of the more dovish regional central bank presidents. His backing of more rate hikes shows the central bank is more united, at least for the next few rate hikes.
Evans suggested he wasn’t so concerned about the convergence of the so-called yield spread between short-term and long-term U.S. government debt, known as the yield curve. This is often a warning of recession.
This time, the yield curve is complicated because long-term interest rates have declined around the world and “the economy and the outlook seems to be quite good,” he said.
On trade, Evans said the ongoing disputes are making businesses wonder about supply-chain decisions, but he said so far the impact has been “relatively small” given the strong economy and stimulus from fiscal policy.
“At the moment, [the trade impact] still seems to be not of the order of magnitude that is getting in the way of strong fundamentals,” Evans said.
Asked if he was concerned about President Donald Trump’s recent criticism of the Fed’s rate hikes, Evans said he took a lot of comfort in the way the Fed was designed by Congress that gave the central bank “a certain amount of independence.”
At the same time, the Fed had not given up “the right to be criticized,” he said.
Read: Trump rips Fed rate hikes, but investors expect Powell to stay the course
Stocks were little changed on Thursday. The Dow Jones Industrial Average DJIA, -0.06% was down 33 points to 25,550.
The yield on the 10-year Treasury note TMUBMUSD10Y, -1.08% fell 2.7 basis points to 2.934%.
