October 5, 2020
(Reuters) – Chicago Federal Reserve Bank President Charles Evans on Monday said he expects U.S. inflation to reach 2% by 2023 and signaled his support for allowing it to rise to 2.5%, a level seen by others at the Fed as excessive.
“The Fed “needs to have an ‘in it to win it’ attitude toward our inflation objective,” Evans said in remarks prepared for delivery to the National Association for Business Economics. “This will require actual overshooting, and we can’t be timid about doing so.”
In August the Fed adopted a new framework to counter long-running structural forces pulling down on inflation, officially aiming for 2% inflation on average.
Last month it put that framework into practice with a promise to keep rates at their current near-zero level until inflation reaches 2% and is on track to overshoot that level for some time. Most U.S. central bankers, including Evans, believe that won’t be until after 2023.
Important questions remain, including whether the Fed will increase asset purchases at some point to speed inflation’s return to 2%. Also unclear is whether or how long beyond 2023 the Fed will keep rates at zero, and how high above 2% will it allow inflation to go.
Evans for his part was clear: though the Fed may start raising rates before inflation reaches the 2% average inflation goal, it ought to keep policy loose enough to allow a strong overshoot.
Letting inflation rise only to 2.25%, as for instance Dallas Fed President Robert Kaplan suggested last week, would keep the Fed from reaching its average inflation goal until 2026, Evans said.
Allow inflation to reach 2.5%, he said, and the Fed could reach the 2% average goal a year earlier.
Had the Fed’s new framework been in place after the last crisis, Evans said Monday, the Fed likely would have waited to raise rates until at least 2017, instead of lifting off from zero in December 2015.
Notably, Evans did not mention bond-buying as a way to boost inflation faster. Previously he had said that any ramp-up in asset purchases should wait until the economy returns to a healthier footing.
Evans said his forecast of inflation reaching 2% and unemployment falling to 4% in 2023 depended on more federal fiscal aid, without which jobs would take longer to return and recessionary dynamics could gain traction. Core inflation is expected to be just 1.5% this year, and unemployment in September was 7.9%.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)