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MNI: Inflation Hasn't Met Fed's Overshoot Goal, Evans Says


Bottleneck-driven inflation will be insufficient to sustain inflation expectations around 2%.

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The Federal Reserve's inflation overshooting criteria for raising interest rates won't be met until longer-run price expectations move up towards 2%, Chicago President Charles Evans said Monday, while indicating agreement with colleagues saying it is almost time to scale back bond purchases.

"If the flow of employment improvements continues, it seems likely that those conditions will be met soon and tapering can commence," he said in the text of a speech. "Future decisions regarding the path of short-term policy rates seem much less clear to me at the moment."

The current burst of inflation linked to supply bottlenecks isn't sufficient to sustain inflation expectations around 2% in coming years, as evidenced by low Treasury bond yields and economist predictions that most price gains will unwound in the next few years, Evans said in a speech to the National Association for Business Economics in Arlington, Virginia.

The job market and fiscal policy are also unlikely to be major drivers of inflation in coming years, Evans said, and inflation expectations already have a downward bias because of the constraint that interest rates are very difficult to cut below zero.

"The public may be thinking we have not really changed our ways and will rein in accommodation with the aim of a quick return in inflation back to 2%. If so, we have more work to do to convince them this is not the case and that we will tolerate a more sustained inflation overshoot," Evans said. "We need to go beyond trying to thread the needle by a couple of tenths in order to be assured of a sustainable moderate overshoot."