Fed should engineer policy to allow inflation to overshoot its target: Fed’s Evans


The U.S. Federal Reserve should engineer monetary policy to spur inflation to rise above its two-percent target because the costs of doing so are less than in past decades, Chicago Federal Reserve Bank President Charles Evans said on Tuesday.

“I see benefits to trying to engineer policy to allow for the strong possibility of inflation overshooting its target,” Evans said at an event in Sydney, Australia.

“I also think it would help to indicate that policymakers would be willing to accept the increased inflationary risk that might accompany further declines in unemployment,” he added, citing his view that the U.S. economy is not yet at full employment and is in unprecedented territory compared to past cycles.

Speaking to reporters after the speech, Evans said he “could be fine” with the Fed raising rates in December, but he wanted to see how the economy and inflation progressed before deciding.

Indeed, he cautioned that it might be better to wait for inflation to rise closer to the Fed’s 2 percent target before moving.

Evans has repeatedly expressed concern on the U.S. central bank’s preferred measure of inflation moving back to its target rate. It currently stands at 1.7 percent.

Evans in his speech said any rise in inflation above the current target would be minimal in the current environment so “if it became necessary, policy wouldn’t have to do much work to lower inflation expectations back down to 2 percent.”

The Chicago Fed president does not have a vote this year on Fed policy but will become a voting member in 2017. Still, currently he does participate fully in deliberations.

The U.S. central bank is still mulling another rate increase almost a year after raising rates from near zero last December.

The Fed looks increasingly likely to raise interest rates this December as long as job gains and inflation show further signs of strengthening.

The Fed also meets in early November but traders do not expect a move then given its proximity to the U.S. election.

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