Fed’s Evans sees inflation curbed with a few hikes past neutral

Bonds

If the Federal Reserve raises its key interest rate somewhat above what it thinks is a “neutral” level for the economy and stops there, that should help bring inflation down from current elevated levels, Chicago Fed President Charles Evans said.

“If we go 50 basis points beyond that, if we go 75 basis points beyond that, then that restrictive setting of policy should be working to bring inflation down,” Evans said Wednesday in a Bloomberg Television interview.

“If we go 50 basis points beyond that, if we go 75 basis points beyond that, then that restrictive setting of policy should be working to bring inflation down,” Evans said.

Bloomberg News

“We don’t have to constantly increase the funds rate to be restrictive. We can get to a restrictive setting and sit there for a while,” he said, referring to the central bank’s benchmark rate.

Fed officials are quickly raising rates in response to high inflation, which in recent months has jumped to the hottest levels in 40 years. U.S. consumer prices advanced 8.3% in the 12 months through April, according to Labor Department figures published May 11.

After an initial quarter-point increase from nearly zero in March, the central bank’s policy-making Federal Open Market Committee opted for a half-point hike earlier this month, bringing the target range for the federal funds rate to 0.75-1%. Fed Chair Jerome Powell reiterated guidance Tuesday that the FOMC would probably authorize additional half-point increases at each of its next two policy meetings in June and July.

“As Chair Powell said, we’re going to be moving expeditiously towards something much more like a ‘neutral’ fed funds rate. My own assessment of ‘neutral’ is in the 2.25-2.5% range,” Evans said.

“I would expect by the end of this year, it could be quite likely that we were at a neutral setting, and I think we would be very well-positioned to address the future inflationary pressures of 2023,” he said. “I’m expecting things to improve from the very-high inflation that we’re having, but I do think it’s going to take us some time to take care of this.”

With strong signals from Fed officials about the likely path for monetary policy this year, investors and Fed watchers are increasingly wondering what comes next. Key questions include how far the Fed will continue to go in 2023, and whether policy makers will ultimately be willing to induce a recession to bring inflation back down to their target.

The Chicago Fed recently announced that Evans, who has served as the bank’s president since 2007, will retire early next year. In a separate interview Wednesday, he said the path for interest rates in 2023 will probably be dictated by the FOMC’s willingness to tolerate inflation at much lower levels than today but still above the central bank’s 2% target.

“Is there more urgency on the upside than there is on the downside? That’s always been something that’s worried me,” Evans, who has often during his tenure been one of the FOMC’s most dovish officials, said.

“What inflation rate are you willing to live with? Or is it the case that we must get inflation down to 2% within a certain period of time?” he said. “These are discussions yet to be had.”

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