(Reuters) – The U.S. Federal Reserve should be willing to embrace inflation above 2 percent half the time and communicate that preference with the public to avoid missing its current target, a top policymaker at the central bank said on Monday.
“While policy has been successful in achieving our maximum employment mandate, it has been less successful with regard to our inflation objective,” Federal Reserve Bank of Chicago President Charles Evans said in New York.
“To fix this problem, I think the Fed must be willing to embrace inflation modestly above 2 percent 50 percent of the time. Indeed, I would communicate comfort with core inflation rates of 2-1/2 percent, as long as there is no obvious upward momentum and the path back toward 2 percent can be well managed.”
Evans’ remarks come ahead of a broad Fed policy review this year that may result in the central bank welcoming inflation that is slightly and temporarily over its target. Some policymakers and analysts think the Fed now has far more ability to respond to upward spikes in prices than to persistently low readings. That is because interest rate cuts lose their potency as borrowing costs approach zero.
But any alternatives to the Fed’s current approach could be controversial and Evans said the central bank will need to debate those options carefully.
Evans also voiced support for the Fed’s current stance of patience on any further rate hikes given “heightened uncertainty,” including the outcome of U.S.-China trade negotiations.
“At the moment, the risks from the downside scenarios loom larger than those from the upside ones,” he said at a New York Association of Business Economists event.
Evans, who as recently as January forecast three rate hikes this year, still says that “some further rate increases may be appropriate over time” if growth is close to its potential. He sees growth at around 1-3/4 to 2 percent this year, lower than his prior estimates.
But he also said policy could be loosened in other scenarios. Many investors are betting that the Fed’s next move is more likely a rate cut than a hike.
“If activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold – or perhaps even loosened – to provide the appropriate accommodation to obtain our objectives,” Evans said.
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