MNI: Fed Evans Sees Rates Topping Out At 4% 'Before Too Long'

Federal Reserve Bank of Chicago President Charles Evans said Thursday he's "open-minded" about the size of the September interest rate hike while awaiting CPI data next week, but added he expects rates to top out at around 4% "before too long" next year.

"Economicprojectionshavebeenprettyclearthatwe'relikelytobeheadedfor above 4% beforetoolongnextyear," he told reporters after speaking to students at the College of DuPage in Glen Ellyn, Illinois. "There will come a time where data dependence is going to mean let's make sure that we're not increasing rates too much ahead of where we think we ought to be, so I worry a little bit about getting ahead of that."

"That being said, I'm open-minded about 50 or 75" at the next meeting, he added.

Market pricing for a third 75 basis point rate increase this month firmed Thursday after Fed Chair Jerome Powell said the central bank is “strongly committed” to fighting inflation at a Cato Institute conference earlier in the day. Such a move would take the fed funds rate target to a 3.0%-3.25% target range.

PAUSE AT PEAK

Evans said he is watching the August CPI report next week for a moderation in the breadth of inflationary factors across the index, including categories like cars that have been most impacted by the pandemic but also categories that reflect broader pressures like shelter costs.

A surprise to the upside on inflation, if coupled with intensifying wage pressures, would argue for getting to the peak funds rate "sooner than I was expecting," he added.

He would prefer not to overshoot on rates and have to dial them back, Evans said. "I would prefer if it were possible to get to a fed funds rate that I thought we could stay at for some period of time and then watch how inflation continued to improve along. If it did not improve we would do more," he said.

"I would prefer to find an appropriate spot to pause and monitor how things are going rather than go much higher and potentially overshoot knowing that we can always turn that around in quick order if that's necessary."

Slowing the economy without having the unemployment rate rise above 4.5% would also be ideal, he added. "I'm hopeful the unemployment rate doesn't have to do all of the work," he said. Special factors going away and expectations staying anchored will do most of the work to keeping inflation in line with the 2% objective, he said.