Chicago President says the pain is worth it to prevent embedded price gains.
Chicago President Charles Evans said Tuesday the Federal Reserve must keep boosting interest rates to restrictive levels and hold them there until price stability is restored, saying the "difficulties" in slower GDP and job growth are worth it to head off persistent high inflation.
Evans agreed with the FOMC's latest "dot plots" showing the fed funds rate will climb 100 or 125 basis points to 4.4% by the end of the year and to 4.6% next year. The U.S. needs a period of below-trend growth and a weaker job market, Evans said, suggesting like his colleagues that a recession can still be avoided. Other experts have told MNI the Fed has a long history of being slow to tighten and this often results in a slump. (See: MNI INTERVIEW: Fed Needs To Hike To At Least 5%- Bordo)
"Reducing inflation to a level consistent with the Fed’s 2 percent objective will require a period of restrictive financial conditions," Evans said. "My FOMC colleagues and I are acutely aware that this slowdown will, unfortunately, cause difficulties for some households and businesses. Yet, failing to restore price stability would result in far greater costs."
The Fed’s key rate would be “clearly restrictive” by yearend when measured against expected core inflation in 2023, Evans said, and QT may add from 35 to 50 basis points of further tightening.
His prepared remarks to the OMFIF in London outlined how "higher inflation is plaguing other industrialized economies" as well. "What began as narrowly concentrated shocks to relative prices has spread, turning into broad-based increases in overall inflation to levels far above every central bank’s target," Evans said.