MNI Policy: Fed's Evans Sees Hike Pause At Restrictive Level

By David Robinson

     LONDON (MNI) - Chicago Fed President Charles Evans said he expected

monetary policy to tighten from its current slightly accommodative stance to a

restrictive level and then to be put on hold "relatively indefinitely".

     In a question-and-answer session at an OMFIF event in London Evans spelled

out what he saw as a plausible path for policy and the Fed Funds rate but

stressed uncertainty.

     -"My strategy is we could increase to a setting of the Funds rate that is

modestly restrictive and then we can hold there relatively indefinitely until we

see the economic outlook adjust," Evans said.

     -He said this outlook was uncertain, with doubts over the level of the

neutral rate, and therefore over where restrictive begins.

     Asked about FOMC members' projected interest rate outturns, the 'dot plot',

Evans said: "I think there is so much uncertainty. If you look at any of the

error bands they are really quite wide around the setting of the Funds rate."

     --MODESTLY RESTRICTIVE

     -Evans' central view was that he was "looking for policy to move gradually

to a mildly, modestly restrictive stance because the outlook is good and

inflation is around our 2% objective and likely to go a little bit above that."

     He said that his estimate of the neutral nominal rate was 2.75% but he left

the door open to its being higher and to more tightening being needed.

     "If I find restrictive is at a higher funds rate ... because maybe R star

(the neutral real rate) moves up then I would be comfortable with that and I

would be comfortable with some uncertainty around my current end point (for the

Fed funds rate) too."

     -Asked how many hikes might be needed next year, Evans said "a couple" but

added that this word covered "one, to two, to three."

     -Evans was cautious over the likely future size of the Fed's balance sheet.

It is currently gently running down its purchased assets, and Evans said that as

the Fed has a large stock it expects little impact on term premia.

     Further down the road, officials would discuss the optimal size of the

balance sheet, he said.

     -Evans expressed optimism that pay growth would accelerate, with employers

facing skill shortages. While many have resisted making substantial pay hikes so

far, which Evans said may be indicative of the market power of large employers,

he said at some point the viability of their business models would depend on

paying the rates required to get the staff that they need.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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