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Fed's Evans says strong economy may justify two 2016 rate hikes

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The US economy will probably be strong enough to justify two Federal Reserve interest-rate increases in 2016, said Chicago Fed President Charles Evans.

[NEW YORK] The US economy will probably be strong enough to justify two Federal Reserve interest-rate increases in 2016, said Chicago Fed President Charles Evans.

"My assessment is the economy is going to be strong enough, we'll be raising rates two times this year," Evans said Wednesday in a CNBC television interview. It "could well be more if we do better." The Chicago Fed chief's comments aligned him with eight others on the 17-member Federal Open Market Committee who projected at the conclusion of their meeting on March 16 that it would be appropriate to raise the benchmark federal funds rate twice this year.

Fed Chair Janet Yellen, in a speech to the Economic Club of New York Tuesday, said the uncertainty around the outlook for US growth stemming from weakness abroad warranted the FOMC proceeding "cautiously." Evans said he expects the US economy to grow between 2 per cent and 2.5 per cent in 2016, which would be enough to push the unemployment rate lower, and may lead to a rate increase when the FOMC gathers in June. The threshold for raising rates when the FOMC next meets in April is probably "pretty high," he said.

"I think moving in June would be on the basis of further improvements in the labor market like what we've had," he said. "Further movement like that would be a good reason to sort of further adjust, gradually, this rate." His caution is due in part to the current low level of US inflation, which has been beneath the Fed's 2 per cent target since 2012. Evans, like Yellen, also voiced concern over weaker inflation expectations.

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"I'm a little nervous that we might get up to about 1.8" per cent inflation, "and then there's an attractor in terms of lower long-term inflation expectations - which appear to be a little bit below 2 - and beyond that might be a challenge," Evans said.

Annual inflation as defined by the Fed's preferred measure, the personal consumption expenditures price index, was 1 per cent in February, according to data released Monday by the Commerce Department in Washington. The so-called core measure, which strips out food and energy prices, was 1.7 per cent.

Evans said the Fed may have to allow inflation to overshoot in the short term to meet its target in the longer run.

"I don't think we should be concerned about going through 2 on the way to making sure we get to 2 with high confidence," he said. "Of course, we wouldn't want it to get out of hand. I don't think we're looking at anything like that in the US, so I think we have the ability to be cautious." Interest rates near zero across many advanced economies will also allow the Fed to go slowly with rate increases, Evans said.

"Given the divergence of monetary policies and the likely effects on exchange rates, those moves are going to be more powerful, not less powerful, and that's going to have an effect," he said. "I don't think we would have to raise rates as much."

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