Evans says two 2017 Fed hikes may be right amid uncertainty

[NEW YORK] Federal Reserve Bank of Chicago President Charles Evans said two interest-rate increases may be the right amount of tightening for the US economy this year given uncertainty surrounding the outlook for inflation and government spending.

"To the extent that I gain more confidence in the forecast I have, that would be a good indicator that I could perhaps support three," Mr Evans said Monday in a Bloomberg Television interview from Madrid with Michael McKee.

"Two might be the right number if there's a little bit more uncertainty."

The stock market has slumped and bond yields declined after the failure of President Donald Trump and his Republican Party to advance health-care legislation last week raised questions about his pro-growth policies.

Investors have also pared back their expectations for rate increases this year and now see a third hike by the end of 2017 as unlikely, according to pricing in federal funds futures.

The Fed had been cautious about including assumptions about fiscal stimulus in its growth forecasts, though the market rally that accompanied Mr Trump's November election victory had helped ease concern about inflation remaining too low.

Mr Evans voted with his colleagues on the US central bank's policy-setting Federal Open Market Committee to raise rates on March 15, when the group last gathered. The median projection of the 17 FOMC participants published alongside the decision showed it would probably be appropriate to increase the benchmark twice more this year.

"I still think that one of the larger uncertainties is whether or not inflation is going to get up to 2 per cent sustainably in the US, and so I don't want to get out ahead of these rate increases, but I thought that it was perfectly acceptable to get one in in March," he said.

"Regarding inflation performance, this will depend a lot on how the fiscal and international issues play out as well as monetary and financial policies," he said later in separate remarks in a panel discussion in Madrid.

While the Fed's preferred gauge of inflation has jumped recently, reaching 1.9 per cent in the 12 months through January, the measure that excludes food and energy components was just 1.7 per cent.

In his Bloomberg interview, the Chicago Fed chief struck an upbeat tone on the health of the US economy, saying "it's unclear if there is any slack" left in the job market.

At the same time, he highlighted the difficulty of estimating the magnitude and timing of any fiscal stimulus that may be enacted by Mr Trump's administration and the Republican-led Congress.

"We probably got ahead of ourselves and thought that some of it would be showing up in 2017 in our first forecast," Mr Evans said, referring to projections submitted at the FOMC's December meeting.

"This last one in March, we moved much more of it to 2018," he added, referring to the effects of any fiscal stimulus that might boost the economy.

BLOOMBERG