WASHINGTON (Reuters) - The Federal Reserve should be “exceptionally patient” in removing its monetary policy stimulus, a top Fed official said on Wednesday, even if doing so means allowing inflation to modestly overshoot the U.S. central bank’s 2 percent goal.
“I am very uncomfortable with calls to raise our policy rate sooner than later,” Chicago Federal Reserve Bank President Charles Evans told a Peterson Institute conference. “I favor delaying liftoff until I am more certain that we have sufficient momentum in place toward our policy goals.”
The biggest risk the Fed faces is choking off the economic recovery by prematurely raising interest rates, he said. Rate rises, when they do come, should be “relatively shallow for some time” to allow the Fed to assess the economy’s ability to withstand tighter monetary policy.
The Fed has kept benchmark U.S. interest rates near zero since December 2008. While most Fed officials agree rates should start to rise next year, exactly when is a point of sharp debate.
Evans, who rotates into a voting seat on the Fed’s policy-setting panel next year, said he expects the economy to reach full employment before inflation is clearly headed back to the Fed’s 2 percent target. He said reaching that target would likely take more than two years.
“I’m nervous that there’s not as much upward momentum in inflation as I would like,” Evans told reporters after his speech.
Evans’ comments suggest his thinking is similar to that of New York Federal Reserve Bank President William Dudley, who this week said the Fed may need to allow unemployment to fall below its long-run sustainable level to bring inflation up.
Evans said the difficulties Europe and Japan have faced fighting falling inflation and outright deflation show that the Fed needs to “proceed cautiously” on rate increases.
“The decision to lift the funds rate from zero should be made only when we have a great deal of confidence that growth has enough momentum to reach full employment and that inflation will return sustainably to two percent,” he said.
He argued a surge in inflation was “not at all very likely,” while a modest, temporary rise in inflation would be manageable.
Given that inflation has hung below the Fed’s target for years, he said: “One could imagine moderately above-target inflation for a limited period of time as simply the flip side of our recent inflation experience, and hardly an event that would impose great costs on the economy.”
In another echo of Dudley, Evans said a much stronger dollar might lead the Fed to pursue an easier monetary policy than otherwise. An index that tracks the dollar against a basket of six other major currencies .DXY hit a four-year high on Wednesday.
Writing by Ann Saphir; Editing by Chizu Nomiyama and James Dalgleish