MNI Fed's Evans Warns Credibility Hinges on Hitting Infl Tgt

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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