Fed's Evans: Should Maintain Accommodation Until Infl On Track

--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

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