MNI: Evans Backs Fed Hiking A Good Deal More, Staying Flexible

Chicago Federal Reserve President Charles Evans on Wednesday supported hiking interest rates a lot further into "modestly restrictive" territory, and said last week's 75-basis-point hike was an example of the FOMC's need to remain flexible as fresh inflation data comes in.

"It will be necessary to bring rates up a good deal more over the coming months in order to return inflation to the Committee’s 2% average inflation target," Evans said in the text of a speech titled "A Stronger Policy Response to Restrain Inflation."

"Inflation is clearly much too high and monetary policy must be repositioned to bring aggregate demand and aggregate supply into balance," he said, adding he's in line with the median policymaker estimate for rates to climb from a range of 1.5%-1.75% to 3.5%-3.75% by yearend.

Strength in the job market and the broader economy suggest continued expansion, Evans said, in a seeming allusion to investor concerns about a hard landing. Higher interest rates will help calm inflation "substantially" over the next few years, he said, along with the unwinding of supply chain troubles and other pandemic disruptions.

FLEXIBLILITY ON FULL DISPLAY

Tighter monetary policy including balance-sheet reduction "is also needed to prevent current large price increases from becoming embedded in pricing dynamics and longer-run inflation expectations," Evans said. "Inflation will be much more difficult to rein in if households and businesses start thinking current outsized increases in wages and prices are the new norm."

Last week's 75bp increase was, as investors suspected, a last-minute switch from earlier FOMC signals about something smaller, Evans suggested. Inflation numbers released the Friday before were "quite disappointing" and another report showed a jump in a key measure of longer-term consumer price views, he said.

"This bad news on inflation was an important consideration for my supporting a 75-basis-point hike in the federal funds rate instead of the 50-basis-point increase we had signaled earlier. And as Chair Powell noted in his press conference after the FOMC meeting, this view was shared by most of the Committee," Evans said.

"This flexible data-driven approach was on full display at the FOMC meeting we held last week," he said, later adding "we must be watchful and ready to adjust our policy stance if changes in economic circumstances dictate."