Fed's Evans Says His Anxiety Over Low Inflation Is Growing -- Update

By Michael S. Derby Features Dow Jones Newswires

Federal Reserve Bank of Chicago leader Charles Evans expressed concern Wednesday that persistently weak inflation in the U.S. may be a more enduring force than central bankers now recognize.

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"Many economists subscribe to the view that this latest drop in core inflation simply reflects temporary factors and that by early next year inflation will be back close to target," Mr. Evans said in a speech in London.

He said that he agreed that this possible, but that "with each low monthly reading, it gets harder and harder for me to feel comfortable with the idea that the step-down last spring was simply transitory."

Mr. Evans, who has been supportive of rate rises this year even as he has signaled his anxiety over inflation that has stayed well short of the Fed's 2% price target, didn't offer a view on the near-term outlook for interest-rate policy. But he did say that it is possible the Fed has played a role in keeping inflation weak by following policies that suggest to the broader public that inflation won't ever be allowed to exceed its 2% target.

Mr. Evans observed that while the Fed's target is supposed to be symmetric and the central bank can sometimes allow prices to go above it, the public's expectations suggest people outside the Fed aren't buying it. He pointed to weak inflation expectations as evidence for his view.

"To dispel the view that 2% is a ceiling, I feel our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome," Mr. Evans said. "This means our public commentary needs to acknowledge a much greater chance of inflation running at 2 1/2 % in the coming years than I believe we have communicated in the past."

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Mr. Evans also said he was worried that too much of the case to boost rates right now rests on fears that very low rates will generate financial instability by way of fueling excessive risk-taking on the back of cheap borrowing costs.

"Giving too much prominence to financial stability considerations in discussions of monetary policy could erode the public's confidence in our commitment to our 2% inflation objective," Mr. Evans said. "We should now be fortifying our efforts -- reinforcing our commitment to symmetry -- so that future policy actions have the best chance for success in a low equilibrium interest rate world."

Looking beyond inflation, Mr. Evans said "the real economy in the U.S. is on solid footing, and I expect this momentum to carry forward into 2018."

"With healthy labor markets and much improved household and business balance sheets, the fundamentals for continued solid growth in 2018 look pretty good," he said.

Write to Michael S. Derby at michael.derby@wsj.com

Federal Reserve Bank of Chicago leader Charles Evans said Wednesday he has an open mind about whether to vote for another interest-rate increase in December, expressing concern that persistently weak inflation in the U.S. may be a more enduring force than central bankers now recognize.

Speaking to reporters following a speech to a conference organized by UBS Group AG in London, Mr. Evans said ahead of the rate-setting Federal Open Market Committee's policy meeting next month he will be paying close attention to signals on inflation following persistent disappointments.

"I will be looking for signs that inflation is going to pick up, that inflation expectations have been increasing," he said, adding his decision next month will depend on these and other economic data. Asked whether that meant he had an open mind about whether to vote for a rate rise, he said "yes."

Mr. Evans has been supportive of rate rises this year even as he has signaled his anxiety over inflation that has stayed well short of the Fed's 2% inflation target.

In his speech, he said it is possible the Fed has played a role in keeping inflation weak by following policies that suggest to the broader public that inflation won't ever be allowed to exceed its 2% target.

"Many economists subscribe to the view that this latest drop in core inflation simply reflects temporary factors and that by early next year inflation will be back close to target," Mr. Evans said.

He said that he agreed that this possible, but that "with each low monthly reading, it gets harder and harder for me to feel comfortable with the idea that the step-down last spring was simply transitory."

Mr. Evans observed that while the Fed's 2% target is supposed to be

symmetric and sometimes allow for inflation above the target, the public's expectations suggest people outside the Fed aren't buying it. He pointed to weak inflation expectations as evidence for his view.

"To dispel the view that 2% is a ceiling, I feel our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome," Mr. Evans said. "This means our public commentary needs to acknowledge a much greater chance of inflation running at 2 1/2 % in the coming years than I believe we have communicated in the past."

Mr. Evans also said he was worried that too much of the case to boost rates right now rests on fears that very low rates will generate financial instability by way of fueling excessive risk-taking on the back of cheap borrowing costs.

"Giving too much prominence to financial stability considerations in discussions of monetary policy could erode the public's confidence in our commitment to our 2% inflation objective," Mr. Evans said. "We should now be fortifying our efforts -- reinforcing our commitment to symmetry -- so that future policy actions have the best chance for success in a low equilibrium interest rate world."

Looking beyond inflation, Mr. Evans said "the real economy in the U.S. is on solid footing, and I expect this momentum to carry forward into 2018."

"With healthy labor markets and much improved household and business balance sheets, the fundamentals for continued solid growth in 2018 look pretty good," he said.

He added he thought newly appointed Federal Reserve chief Jerome Powell will do "a very good job" when he succeeds Janet Yellen in February.

Write to Michael S. Derby at michael.derby@wsj.com and Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

November 15, 2017 12:44 ET (17:44 GMT)