MNI: Fed's Evans Sees Rates Holding Above 4.5% By Early 2023

Federal Reserve Bank of Chicago President Charles Evans on Monday called for the Fed to raise its benchmark interest rate to above 4.5% by early next year and hold it there for some time to bring supply and demand back into balance and ensure that inflation expectations remain in check.

It's possible to return inflation to the Fed's 2% objective without causing the economy to shed a lot of jobs, he added.

"I see the nominal funds rate rising to a bit above 4.5% early next year and then remaining at this level for some time while we assess how our policy adjustments are affecting the economy," he said. "When you factor in inflation expectations and the reductions in our balance sheet, we’ll be at something equivalent to nearly a 2% real funds rate at this time."

"Inflation is our primary concern. Reducing it will likely require a sustained period of restrictive monetary policy, below-trend growth, and some softening of labor market conditions. But this is necessary to restore inflation to our 2% target," he said.

JOB OPTIMISM

The FOMC projects the unemployment rate to rise to 4.4% by late next year and staying there for the next two years as tighter monetary policy takes hold.

"While this does represent a noticeably softer labor market when compared with today’s, these certainly are not recession-like numbers," Evans noted.

He sees a combination of further supply-side repair, a steeper Phillips curve, and anchored long-run inflation expectations moving inflation back to target without having to "generate an inordinate amount of slack in the economy."

At the current unemployment rate, labor market stress is having a larger effect on inflation than would typically be the case, he said, pointing to the economy's having a similar jobless rate in 2019 without much inflation.

"If this steeper-than-usual Phillips curve is generating much of the higher inflation we are seeing now, then we should also expect this steeper curve to help bring inflation down relatively quickly with only moderate increases in unemployment."