CHICAGO (Reuters) - The Fed should cut interest rates by half a percentage point before the end of the year to boost persistently weak inflation and convince the public that policymakers are serious about their 2 percent inflation target, Chicago Federal Reserve president Charles Evans said on Friday.
“Inflation expectations seem to me to be anchored a little bit below a level consistent with our two percent objective, and it has been stubborn like that,” said Evans, currently a voting member of the Fed’s rate setting committee. “That tells me our current setting for policy is a little bit on the restrictive side...I need a couple of rate cuts...in order to get the inflation outlook up.”
The Fed meets later this month and is widely expected to make a cut of at least a quarter of a percentage point.
Evans’ comments expand on what has become a broad set of reasons for the Fed to cut rates, each providing a different set of policymakers a rationale for lowering borrowing costs even with unemployment near a record low and, by most accounts, the economy growing at a healthy pace.
In testimony before Congress this week, Fed chairman Jerome Powell focused on risk management, and buttressing the U.S. against slowing global growth and a shock to business confidence in May following a spike in world trade tensions.
Others have argued for lower rates as a boon to workers that the Fed should push to its limits. There have been more abstract justifications as well around a perceived fall in the “neutral” rate of interest, which by implication means the Fed’s current target policy rate is more restrictive than previously estimated.
If that amalgamation of reasons has helped a consensus emerge, Evans says he thinks the Fed’s need to “ratify” its commitment to the inflation target would on its own warrant a policy shift.
While there may be doubt that lower interest rates alone would lift the pace of price increases, he said a rate cut at this point would help to lift expectations and show that the Fed takes its inflation target seriously.
In his estimation a half a percentage point reduction now would help lift inflation to 2.2 percent by 2021.
“Timing is not critical. Talking about it is important,” Evans said. “Just going out there and trying to explain to everybody that symmetric means going above 2% is consistent with how we do things.”
Reporting by Howard Schneider; Editing by Chizu Nomiyama