LONDON (Reuters) - Chicago Federal Reserve President Charles Evans said on Wednesday he was concerned the strong dollar’s “clear disinflationary pressure” could get embedded in expectations.
That could make it even harder for the Fed to reach its 2 percent inflation target, he said, although the strength’s impact on inflation - lowering the cost of imports - would be short-lived.
Until the Fed was more confident of inflation heading back to the 2 percent area, there was “no compelling reason” to hurry and raise interest rates, he added, urging a delay in rate hikes until the first half of next year.
The dollar index hit a 12-year high earlier this month against a basket of major currencies but has retreated since the Fed downgraded its forecasts for growth, inflation and interest rates last week and chair Janet Yellen cited dollar strength as an influence.
But Evans said it was important to remember the potentially fleeting nature of currency market developments.
“To the extent that whatever movements in the dollar take place and then there’s some level of stability, that change in import prices unwind(s),” Evans, a frequent advocate for restraint in raising U.S. interest rates, said.
“It is transitory and our normal U.S. monetary influences on inflation ought to become more important at that point.”
Evans was speaking in London at an conference being hosted by the Official Monetary and Financial Institutions Forum.
As a partly offsetting factor to the dollar’s strength, Evans cited lower energy costs, which he sees benefitting consumers and some businesses.
“The dollar has been stronger... (and) it will be a challenge for some but energy prices are having beneficial effects for consumers and many businesses,” he said.
To feel comfortable about raising rates, Evans said he would need to see a rise in core inflation above the current level of 1.3 percent, an increase in wage growth to a range of 3 to 4 percent annually, and a rise in inflation expectations.
Most of Evans’s colleagues on the policy-setting team expect the Fed to start raising rates this year and to continue raising them about a quarter of a percentage point every other meeting.
But Evans said most market players expect the Fed to move even more slowly. His remarks were accompanied by a graph of expectations that suggest traders agree with the rate hike views of the Fed’s two most dovish policymakers, of which he is one.
“It would be very surprising if inflation did not begin to pick up to 2 percent, I share the optimism of so many of my colleagues that it will pick up but I just don’t have the same confidence in the time profile of this, “ Evans said.
Reporting by Francesco Canepa, Ahmed Aboulenein and Ann Saphir Editing by Jeremy Gaunt