MNI POLICY: Evans- Rate Could Rise Before Inflation Avg Hit

The Federal Reserve could raise interest rates before the new goal of averaging 2% inflation is reached, adding officials haven't had definitive talks on those details, Chicago President Charles Evans said Tuesday.

The FOMC hasn't decided when to start the clock on inflation averaging, he told the Official Monetary and Financial Institutions Forum. Even if it was set in Q1 it may take until between 2026 and 2028 if a "timid" overshoot of 2.25% was put in place, he said.

"We've sort of said we are looking to get inflation up to 2%, and then after that, we could be raising rates and still have an accommodative setting of monetary policy," he said. "If you read the statement, that's in the cards, and so, we could start raising rates before we start averaging 2%, we need to discuss that."

"We do not have an explicit formula for, is there a clock, when do we start averaging, are we going to exactly average," said Evans, who joins the FOMC as a voter next year. "These are details yet to be discussed." Evans speaks Wednesday at an MNI event.

QE A PARTIAL ANSWER

The Fed also needs more discussion of QE but 10-year Treasury rates are already quite low and current guidance on rates sends a strong signal about policy makers' commitment, he said.

Monetary policy has limits in a situation where the pandemic forces people to stay apart and demand may also be hurt by cutbacks at state and local governments. "For the moment I don't see open-ended QE as providing an important part of that answer," Evans said.

The U.S. economy can take back much of the jump in unemployment and reach 5.5% next year, if another fiscal package is realized and there is a vaccine, he said. Delivering a fiscal package of USD500 billion-USD1 trillion is more important than exact timing and without it "the recessionary dynamics are going to kick in in a much bigger way," he said.

Asked if an era of low interest rates and big deficits threatens the Fed's independence as some saw happening after World War II, Evans said: "I would love to raise interest rates, but we need to be following the real economy up, not holding back the real economy," he said.