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Manufacturing Sentiment Slips

By Jean Yung
     WASHINGTON (MNI) - Chicago Federal Reserve Bank President Charles Evans on
Wednesday again warned the Fed's credibility hinges on hitting its 2% inflation
goal, saying it is becoming increasingly difficult to believe below-target
inflation is a transitory phenomenon. 
     "At times we've been able to explain our misses with some easily
identifiable transitory factors, such as energy price pass-through or a higher
dollar. But that isn't true now," Evans said in remarks prepared for the UBS
European Conference in London. 
     "And with each low monthly reading, it gets harder and harder for me to
feel comfortable with the idea that the step-down last spring was simply
transitory." 
     Failure to achieve the inflation target poses a "big strategic risk" for
the Fed, especially if rates hit the zero lower bound again in a future
recession, said Evans, who votes on rates this year. 
     We are living in a world of low trend growth and low equilibrium interest
rates, he said. That means it is much more likely the Fed will have to lower
rates to near zero in the next downturn. 
     "Effective monetary policy actions at the ZLB often take the form of
commitments regarding future policy rates or the scale and scope of nonstandard
policies. For these to work, central banks need substantial credibility for
meeting their mandated policy responsibilities, particularly their inflation
targets," Evans said. 
     "For the U.S, this means achieving our symmetric 2 percent inflation
objective," he said. 
     Although it is possible that the latest drop in core inflation simply
reflects temporary factors, as many economists believe, Evans said, he
emphasized that it's the Fed's consistently missing its target that worries him.
     Below-target inflation expectations may be partly to blame, he said. The
University of Michigan's Survey of Consumer Expectations shows  its five- to
10-year inflation expectations measure has fallen 50 basis points since 2006.
     Another factor may be the Fed's apparently lack of communication that it is
willing to tolerate inflation as high as 2.5% as a feature of its inflation
target being symmetric, he said. 
     "Such communications would shore up our credibility and demonstrate our
commitment," he said. "They would also increase policymakers' ability to attain
their goals in normal times and to strengthen the policy framework to deal with
future challenges presented by unexpected economic and financial developments." 
--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com
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