There’s little reason for the Federal Reserve to raise interest rates until inflation rises above the Fed’s 2% target, Chicago Federal Reserve Bank President Charles Evans said on Thursday, noting that he expects low inflation to be a problem for the next few years.
Evans forecast U.S. unemployment to fall only to 6.5% by the end of next year, well above the 4.5% most Fed policymakers see as consistent with full employment.
Even if unemployment falls below 4%, experience has shown that inflation won’t respond by surging, Evans said.
“I am hard pressed to think of reasons why we would need to move away from accommodative monetary policy unless inflation was well above 2% for an extended period of time, and the economy was just very different from what we are seeing right now,” he said in a virtual event held by the Global Interdependence Center. “That doesn’t seem to be very likely.”
The Fed has slashed interest rates to near zero and bought trillions of dollars of bonds to shore up financial and credit markets during the COVID-19 crisis. Monetary policy, he said, needs to be positioned to battle downside risks to the economy, such as those posed by a resurgence in infections across the country. Central to that, he said, is getting across the message that the Fed will stay accommodative even as the unemployment rate drops, as long as inflation doesn’t careen out of control.
“I think it’s very important that we get inflation up to 2%; I’m looking for that to be a real problem over the next few years,” he said.