Tags: Federal Reserve | Charles Evans | inflation | rates

Fed's Evans Calls for Patience to Avoid Premature Rate Increases

Wednesday, 24 September 2014 01:27 PM

Federal Reserve Bank of Chicago President Charles Evans said he favored patience as the central bank ponders when to raise interest rates for the first time since 2006.

“The biggest risk we face today is prematurely engineering restrictive monetary conditions,” Evans said in remarks prepared for a Washington conference on labor-market slack. “I am very uncomfortable with calls to raise our policy rate sooner than later.”

A majority of the Fed’s policy-setting committee on Sept. 17 stuck with a pledge to keep interest rates unchanged for a “considerable time” after the central bank ends bond purchases, which it projects will happen after next month’s meeting. Two voting members, Dallas Fed President Richard Fisher and Philadelphia’s Charles Plosser, dissented. Each has warned that keeping rates too low for too long risked triggering excessive inflation.

Evans, who doesn’t have a vote on the Federal Open Market Committee until next year, said it was crucial for the federal funds target rate to move away from zero only when policy makers were sure they wouldn’t have to retreat later.

“The risks imposed on an economy forced to operate at the zero lower bound on policy rates are paramount,” he said at the conference, sponsored by the Peterson Institute for International Economics. “Before the Fed raises rates we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period” with rates back at zero.

Inflation Target

That means the FOMC should be prepared to temporarily accept an inflation rate that exceeds its 2 percent target, Evans said.

“We should be exceptionally patient in adjusting the stance of U.S. monetary policy, even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives,” he said.

The Fed dropped its benchmark rate to a range of zero to 0.25 percent in December 2008. Evans said if the rate wasn’t already near zero, the Fed would have liked to cut it by another 3 percentage points in 2009 as unemployment reached 10 percent. That forced the FOMC to adopt “second-best options,” he said.

Evans, 56, drew attention to moves taken by the U.S. government in 1937 to tighten monetary policy in response to improving economic conditions. Those proved premature, he said, and ensured the Great Depression was only ended by fiscal expansion during World War II.

“History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap,” he said.

Evans also said he favored moving slowly after the first rate increase.

“We should plan for our path of policy rate increases to be shallow in order to be sure that the economy’s momentum is sustainable in the presence of less accommodative financial conditions,” he said.

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Federal Reserve Bank of Chicago President Charles Evans said he favored patience as the central bank ponders when to raise interest rates for the first time since 2006.
Federal Reserve, Charles Evans, inflation, rates
Wednesday, 24 September 2014 01:27 PM
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