MNI POLICY: Fed's Evans: Inflation To Remain Around 2%

By Sara Haire

     WASHINGTON (MNI) - Unlike in December when he dissented from a federal

funds rate hike, low inflation seems to no longer be a concern for Federal

Reserve Bank of Chicago President Charlie Evans. Instead, he sees the economy

being in a good place and expects inflation to remain around the 2% objective,

emitting a generally positive outlook despite businesses concerns over trade

policies and reported labor shortages.

     In an interview with wire service reporters, Evans said he is "pleased to

see inflation increase to 2%" and that, in line with a well performing economy,

inflation moving up to "2.25% and even to 2.5% -- as long as it's not expected

to accelerate - could well be consistent with the symmetric objective." 

     In December 2017, the Federal Open Market Committee decided to raise

interest rates and Evans, along with Minneapolis Fed President Neel Kashkari

voted against the decision. Evans said his reason was since inflation had been

below their target, "there was a good risk management argument for waiting." 

     This argument no longer stands in his view. Instead, he said that in

regards to concerns over lower inflation that we are "in a better place here."  

     While the core PCE price index year/year pushed to 2.0% in March and has

subsequently retreated to 1.9%, Evans said that it could easily move 0.1pp in

either direction, but "most of that is noise" and that the momentum for

inflation has picked up, but not necessarily accelerated. 

     However, Evans did note that market expectations for inflation that appear

to underpin inflation are "a bit lower than what I like to see." 

     President Evans is not a voting FOMC member for 2018, but will be in

2019--just in time to deal with the issue of reaching neutral interest rate

territory. 

     --SLIGHTLY BELOW NEUTRAL, UNCERTAIN

     Where the neutral interest rate resides and what that may mean for the

intended policy path has been a topic policymakers have been focused on recently

as they continue to remove accommodation. Currently, the median longer-run rate

as seen in June's Summary of Economic Projections stood at 2.9%. 

     Evans said that it "is hard to pin down the neutral funds rate" and that

the argument for neutral being at 2.5% to 3.0% is "defendable," but where the

neutral rate is is still uncertain. 

     However, Evans did say that he thinks "we're still less than neutral, but

there's a lot of uncertainty," and where the view of neutral is could change

"somewhat quickly." 

     Evans said that he "currently believe[s] that sustainable real interest

rates are substantially lower than it used to be five years ago." He also said

that as the economy continues to pick up, he would "expect some cyclical side of

the real rate to move up."

     --RISKS NOT AS CONCERNING

     President Evans explained that while there is some injected uncertainty,

"business confidence continues to be high" and that "business optimism is good."

He continued on to say that the magnitude of the effects "still seems to be

relatively small," especially in the context of the economy being strong.

     He said that some businesses have started "reworking supply chains in

anticipation of a longer period of unfavorable" conditions.  

     While businesses remain concerned over trade issues, there have also been

raised concerns over labor shortages having gotten particularly worse with no

feasible solution in sight. 

     Evans said he is "encouraged that employment growth has been as strong as

it has been," but he also said that he is surprised by the strength given how

late we are in the expansion. 

     Despite being surprised by the growth, Evans said that he is

"uncomfortable" with the suggestion that there is a ceiling level with

employment. 

     Some analysts and economists have suggested that we're tip-toeing near

maximum employment, however businesses have voiced frustration with labor

shortages and, as Evans explained, some of this is due to a "brain drain"

because of a systemic problem of fewer people wanting to live in certain areas. 

     If Evans is correct that it is an issue about the location of the jobs and

not the money offered, automation and technology may be better suited to handle

those problems moving forward. 

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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