Chicago Federal Reserve Bank President Charles Evans
The U.S. Federal Reserve should be "exceptionally patient" in removing monetary policy accommodation, a top Fed official said on Wednesday, even if doing so means allowing inflation to modestly overshoot the central bank's 2 percent goal.
"I am very uncomfortable with calls to raise our policy rate sooner than later," Chicago Federal Reserve Bank President Charles Evans said at a Peterson Institute conference on labor market slack.
"I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals."The biggest risk the Fed faces is choking off the economic recovery by prematurely raising rates, he said. Rate rises, when they do come, should be "relatively shallow for some time" so as to give the Fed time to assess the ability of the economy to withstand tighter monetary policy conditions.
Evans' aggressively dovish comments, coming as the Fed prepares to wind down its bond-buying stimulus next month, underscores the battle that is taking place behind the scenes on the Fed's policy-setting panel.
The Fed has kept interest rates near zero since December 2008. Most Fed officials agree that rates should start to rise next year, but exactly when is a point of sharp debate, with St. Louis Fed President James Bullard calling for a March increase, and others urging a later liftoff.
Evans, though he won't have a vote on the Fed's policy-setting panel until 2015, has been an influential voice at the central bank.
Evans said he expects the economy to reach full employment before inflation is clearly headed back to 2 percent. Most Fed officials expect unemployment, now at 6.1 percent, to reach its long-run 5.2 percent to 5.5 percent range by the end of 2016.
The difficulties that Europe and Japan have faced fighting falling inflation and outright deflation show, he said, that the Fed needs to "proceed cautiously" on rate increases.
"The decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return sustainably to 2 percent," he said, adding that he sees a good deal of slack in the labor market.
Additionally, he argued, a surge in inflation is "not at all very likely."
A modest and temporary rise in inflation, however, would be manageable, he suggested. Given that inflation has hung below the Fed's 2 percent target for years, he said, "(o)ne could imagine moderately-above-target inflation for a limited period of time as simply the flip side of our recent inflation experience — and hardly an event that would impose great costs on the economy."