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Evans: Low Inflation Will Require Patience On Interest Rates

fedIn today’s BMO Harris and Lakeland College economic briefing, Charles Evans, President of the Chicago Federal Reserve Bank urged the US central bank to be patient when it comes to raising rates while pointing out obvious risks specific to inflation and growth.

Because longer-term inflation expectations are dropping close to after crisis lows, there is concern that inflation may not recover to the 2% target within what is deemed a “reasonable” amount of time.

This concern along with an ongoing lull in labor markets should push the US central bank to be patient when federal fund rates are first increased but also when setting the pace of those increases once movement begins.

Interest rates have been maintained near zero dating back to December 2008. In addition, the Fed purchased trillions of dollars in long-term securities in an effort to drive costs down even further.

However, with last month’s unemployment rate at 5.9%, which is down considerably from the high rate during the recent recession, there are plans by the Fed to stop the bond-buying stimulus at the end of this month. In addition, by next year the majority of top Fed officials want to start increasing rates.

In the statement, Evans, who previously wanted to wait until 2016 to raise rates, re-emphasized his uneasiness about the Feds wanting rates to increase earlier than expected. He added that rates should stay low, even if there is risk of inflation pushing beyond the 2% target set by the Feds.

Next year, Evans will join the Fed’s panel for policy setting, thereby granting him an official vote. As far as economic growth, Evans forecasts 3% over the next 18 months. He also predicts by the end of 2016, unemployment rates will drop to 5% with inflation experiencing a slow return to 2% within the next three years.

Even so, a few risks pertaining to Evan’s forecasts remain such as slow worldwide economic growth. There is also risk that rates will be increased too quickly, which could ultimately stifle growth but also force the Fed to backpedal.

Overall, the greatest risk according to Evans is engineering restrictive monetary conditions prematurely.

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