Federal Reserve Bank of Chicago President Charles Evans said Tuesday that the U.S. central bank can wait until the end of the year before making the decision to raise rates again, while adding it could start reducing the size of its balance sheet before that.
"We are now at a point where we can afford, having raised the rates twice [in 2017], we can wait a little bit" to see if unexpectedly weak inflation over recent months starts to perk back up, Mr. Evans told a gathering of Wall Street Journal reporters. He said it is possible "we could wait until the end of the year" and next move interest rates higher at the December meeting, if that is what the economy's performance calls for.
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"We've had too many experiences" of forecasting higher inflation only to see it fall short of expectations, Mr. Evans said as part of his argument that the Fed has time to decide on its next interest rate action.
And even if the Fed holds steady for a while, he observed the central bank's official forecasts "don't say when [increases] are going to take place." A year-end move would still conform to what is the current Fed outlook, he said.
The official was interviewed in the wake of last week's pivotal Federal Open Market Committee meeting. At that gathering, officials boosted their short-term interest rate target range for the second time this year, to 1% and 1.25%, and laid out a plan for reducing their $4.5 trillion balance sheet, most likely later this year. Mr. Evans is currently an FOMC voting member.
The Fed also signaled that most officials are looking to around one more rate increase in 2017, maintaining a view policy makers have held for a while now. But that outlook is increasingly being called into question in light of a spate of recent economic data that shows inflation trends cooling rather than rising back to the central bank's official 2% rise target.
That has caused some to question whether the Fed should hold off on raising rates again until there is firmer evidence inflation is indeed moving back to desired levels. Last Friday, Minneapolis Fed chief Neel Kashkari explained his vote opposing the rate rise by saying it was a mistake to boost the cost of borrowing with inflation so short of the official target.
Meanwhile, Dallas Fed leader Robert Kaplan, who is also an FOMC voter, said Friday what happens with rates does indeed depend on price pressures. "We should be very careful about raising rates, and we should do it patiently and carefully," adding, "I'm going to need to see improvement" in inflation before getting on board with another rate rise.
Still, officials such as Chairwoman Janet Yellen and New York Fed President William Dudley seem confident inflation setbacks should be temporary. Mr. Dudley said in an appearance Monday "inflation's a little bit lower than what we would like. But we think if the labor market continues to tighten, wages will gradually pick up, and with that we'll see inflation get back to 2%."
Mr. Evans also said in the interview that even if the Fed does hold off on rate rises until very late in the year, that needn't stop the institution from pressing forward with its plans to allow its balance sheet to start shrinking at some point this year.
Last week, the Fed offered key details on how it would allow its holdings of cash and bonds, which grew rapidly due to financial crisis stimulus efforts, to start moving lower. The central bank plans to allow its holdings to shrink slowly and passively by allowing increasing amounts of Treasury and mortgage bonds to be matured and not replaced.
"I think we are the point where we can make a decision to start reducing the balance sheet at any time," Mr. Evans said. The plans are well explained and because of that, he expects there should be little market reaction once the effort starts.
Mr. Evans added he fully expects the process to run in the background with changes in short-term rates the more important factor for the direction of the economy.
The policy maker also praised Chairwoman Yellen and said he would be happy to see her reappointed to the job in 2018. "I do think she's worthy of that," Mr. Evans said.
Write to Michael S. Derby at email@example.com
(END) Dow Jones Newswires
June 20, 2017 11:27 ET (15:27 GMT)