Fed's Evans says fiscal boost could lift growth forecasts

[WASHINGTON] Chicago Federal Reserve President Charles Evans said government stimulus policies could boost growth and reduce the need for monetary accommodation, underscoring some investor expectations that President-elect Donald Trump's policies will lead to higher interest rates.

A government stimulus "might increase growth by a couple of tenths over the next two years," Mr Evans told reporters Thursday after speaking at an event in Naples, Florida.

"We look forward to refining that when we actually see proposals that are moving forward and likely to be implemented," he said about gross domestic product forecasts, adding that estimates could go even higher depending on what policies are implemented.

If the economic outlook improves, "we would need less accommodation or, put it a different way, the current low setting of the funds rate would all of a sudden become that much more accommodative," said Mr Evans.

Mr Evans, a voting member of the policy-setting Federal Open Market Committee this year, has advocated for two interest-rate increases in 2017, though three quarter-point moves is "not implausible," he said Jan 6.

Gross domestic product will expand 2.1 per cent in 2017 and 2 per cent next year after climbing 1.9 per cent in 2016, according to the median forecast of Fed officials.

Their quarterly estimates, published Dec 14, suggest the central bank will raise interest rates three times in 2017 after just one increase last year.

Fed Chair Janet Yellen stressed at the time that only some central bankers had incorporated potential fiscal policy changes in their forecasts. While Mr Trump's plans to cut taxes and boost spending may boost growth and fuel inflation, many economists are concerned that his pledges to impose trade barriers could undermine the economy.

The US dollar has retreated in recent days from a 14-year high as a growing number of investors bet his promises to stimulate GDP will come up short.

'Both Ways'

Philadelphia Fed President Patrick Harker echoed those concerns on Thursday, saying Mr Trump's policies "could cut both ways" and that it's too soon to change forecasts on the economy or monetary policy.

"I want to get a little more data before I make that decision" regarding when the central bank should next raise interest rates, he told reporters following a speech Thursday in Malvern, Pennsylvania.

"My crystal ball is not that good," he said about factoring fiscal policies into his projections at this point.

St Louis Fed President James Bullard, in an interview Thursday on CNBC, said the still-sluggish movement of inflation meant the Fed could respond slowly without falling behind in terms of its monetary tightening campaign.

"You can afford to be patient here and see what happens and see how much really transpires," he said, referring to economic policies from the incoming administration.

"They've got to all materialise, and details matter."

BLOOMBERG