MNI: Fed's Evans: Only 'Moderate' Policy Responses Needed

--Little Risk of Economy Overheating

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Chicago President Charles Evans

does not appear to see much risk of the U.S. economy overheating in spite of

stimulative budget and tax reform, soaring confidence and positive global growth

momentum. That view puts him in more dovish territory compared to most other Fed

policymakers who believe the economy faces a real risk of running too hot. 

     "I think we have the opportunity to more patiently read -- and react to --

the incoming data," he said in remarks prepared for the Chicago Rotary Club on

Tuesday. "That is, I think we can undertake more moderate monetary policy

adjustments today than often was the case in the past." 

     Despite a strong economy and a low unemployment rate, inflation remains

low, he noted. Statistical evidence indicates that the linkage between

unemployment and inflation is weaker today than in the past, he said. 

     Plus, after many years of below-target inflation, inflation expectations

today are "actually too low," he said. "Most recent analyses of inflation see

little risk today of the accelerating self-reinforcing inflation dynamics that

were evident back then," in the 1970s. 

     Against that backdrop, an upturn in inflation is welcome because it should

help solidify inflation expectations symmetrically around the Fed's 2%

objective, which has long term benefits, he said. 

     If wages and inflation started rising above the Fed's 2% target, then the

sustainable unemployment rate is very likely higher than the Fed's current

estimate of 4.5%, and policy should react in a gradual, patient manner.

     On the other hand, if wages and prices don't start rising faster, then

either the natural rate of unemployment is lower and "policy does not need to

tighten much," or the economy is facing non-monetary issues such as structural

labor market inefficiencies that also would not elicit an interest rate

response, he said.  

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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