NEW YORK--Raising short-term interest rates off currently near
zero levels this year would be a mistake, Federal Reserve Bank of
Chicago President Charles Evans said Wednesday.
"We should be patient in raising interest rates," Mr. Evans
said. "I think economic conditions will evolve in a way such that
it will be appropriate to delay normalizing monetary policy--that
is, to hold off on raising short-term rates--until 2016," he
said.
On one side, "economic activity appears to be on a solid,
sustainable growth path," he said. But, "inflation is low and is
expected to remain low for some time--and I have serious concerns
that inflation will run even lower than I expect," the central
banker said in the text of speech prepared for delivery at an event
in Lake Forest, Ill.
Mr. Evans' belief that the Fed is unlikely to find the
conditions it wants to raise rates this year puts the veteran
central banker at odds with most of his colleagues, who believe the
central bank will be able to increase rates this year. Several
officials have said they would like to open the door to considering
rate increases starting with the central bank's mid-June policy
meeting.
Mr. Evans and the other Fed officials agree growth and hiring
have all been positive, and for many officials, that is enough to
support the view rates could begin to increase. But on the other
side, the central bank has fallen short of its 2% price target for
nearly three years, which argues against any move higher until
there is greater clarity inflation gains will move back to levels
Fed officials deem desirable.
Mr. Evans' opposition to rate rises could put him in a
dissenting role on the rate-setting Federal Open Market Committee,
where he holds a vote this year.
"The FOMC should refrain from raising the federal funds rate,
until conditions indicate much greater confidence in forecasts of
inflation getting to 2% in a year or two. I see no compelling
reason for us to be in a hurry to tighten financial conditions
before that time," Mr. Evans said.
The policy maker believes the Fed won't get to its 2% price
target until some time in 2018, which would indicate the Fed could
raise rates at some point in the first half of 2016. Mr. Evans also
noted that "there is no great cost even if we were to end up with a
period of inflation running moderately above 2%. It would just be
the symmetric flip side of our recent below-target inflation
experience."
Although Mr. Evans is concerned about inflation, he's less
worried about growth. He sees 3% activity gains over the next
couple of years, and further progress in lowering the unemployment
rate.
"With 3% output growth, job gains should remain above the
200,000 mark for some time before gradually moving back down toward
its longer-run trend," he said. The official added that he believes
the economy's natural rate of unemployment--the point where further
job gains might start creating inflation--stands at 5%, lower than
what many of his colleagues believe. The current jobless rate is
5.7%.
For Mr. Evans, this suggests the job market isn't as healthy as
many now believe. The official also said his confidence inflation
was moving back to 2% would be bolstered by a rise in core price
measures--they strip out food and energy costs--joined with rising
wage gains and increased inflation expectations held by the
public.
Write to Michael S. Derby at Michael.derby@wsj.com
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