NEW YORK (MaceNews) – Monetary policymakers must be wary of tightening policy too much and too soon if they are to execute the Federal Reserve’s new average inflation targeting strategy, Chicago Fed President Charles Evans said Wednesday.
Evans, in remarks for delivery to the Metals Service Center Institute, repeated that the Fed is now obliged to allow inflation to overshoot the 2% target moderately for some time.
Evans offered possible scenarios illustrating how long it might take to achieve the average inflation target and warned the Fed must avoid the inclination “to back off the overshoot too soon.”
“Forget the many years since 2008 of under-running our 2 percent inflation target, and let’s just calculate the average beginning with the price level in the first quarter of 2020,” he said.
“Core PCE inflation in the SEP is projected to be 1-1/2 percent this year and then gradually rise to 2 percent in 2023. Suppose it hits 2-1/4 percent in 2024 and then remains there. In this scenario, average core inflation does not reach 2 percent until mid-2026. That is a long time.”
Under a scenario that inflation hits 2.5% in 2024 and beyond, the Fed would reach its average a year earlier, though some Fed officials “might view 2-1/2 percent inflation as an excessive overshoot,” Evans said.
“Now, we are not going to follow a strict numerical formula to determine the time of liftoff and how long to keep policy accommodative after liftoff. Still, these calculations illustrate that we likely have a lot of work ahead of us.
“And it’s crucial that we acknowledge the magnitude of the job up front to help lessen the temptation to back off the overshoot too early in the process. It is important for us to be ‘in it to win it’ if we are going to achieve our mandates.”
Evans said the Fed’s work to reach its average inflation target would continue even after the Fed begins to raise interest rates. “The statement also recognizes that our work on inflation is unlikely to be complete when we first begin to raise rates, and so it also indicates that we will maintain accommodative monetary conditions until our inflation averaging goal is met,” he said.
Elsewhere in his prepared remarks, Evans said the economy’s performance remains uneven across sectors, with services requiring face-to-face interactions continuing to lag. Evans repeated that his baseline recovery forecast includes an expectation of additional federal fiscal support.
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