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MNI (Washington)
--No Evidence To Suggest Infl Will Soon Break Out
--Credibility of Fed's Price Stability Goal at Stake
By Jean Yung
     WASHINGTON (MNI) - The Federal Reserve should keep interest rates where
they are until there is more evidence that inflation is back on track toward
reaching the 2% target set by the central bank, Chicago Federal Reserve Bank
President Charles Evans said Monday. 
     Not doing that could signal a lack of concern over the fact that inflation
continues to fall short of the Fed's objective and ultimately hurt the Fed's
credibility, said Evans, who votes on rates this year. He added that he is still
"broadly comfortable" with a gradual removal of monetary accommodation and the
median Fed official's view of the fed funds rate reaching 2.7% by the end of
2019. 
     "We should avoid taking policy steps that could be misread as a lack of
concern over the inflation outlook. In my view, that would be a policy misstep
that would further delay achieving our inflation objective," Evans said in
remarks prepared for the Economic Club of Grand Rapids in Michigan. 
     "I think we need to see clear signs of building wage and price pressures
before taking the next step in removing accommodation." 
     Evan said Monday he sees the fundamentals for economic growth as "good" and
the labor market as "robust." But, "disappointingly low core inflation is
telling us that important pricing headwinds persist" and should be given more
attention.  
     One explanation could be that there is actually greater slack in labor
markets than the Fed currently estimates. Another, "more troublesome potential
development," according to Evans, is that inflation expectations may be too low.
     "I am concerned that inflation expectations are too low today, making it
harder to achieve our 2 percent target," he said. "Actual inflation can take on
a bit of a self-fulfilling nature, as expectations of future inflation become
embedded in current wage and price decisions." 
     What's more, at present he does not see "much risk of an outsized breakout
in inflation," Evans said. Tighter labor markets will contribute to a gradual
increase in wage and price pressures, but "statistical evidence indicates that
the linkage between unemployment and inflation is not as powerful today as it
was in earlier times," he said. 
     While his colleagues on the Federal Open Market Committee expect inflation
to gradually move up to 2% by 2019, Evans said his forecast is "slightly less
optimistic," even if he believes that it is possible to reach that target over
the medium term with appropriate monetary policy. 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
[TOPICS: MMUFE$,M$U$$$]
MNI Washington Bureau | +1 202-371-2121 | jean.yung@marketnews.com