By Steven K. Beckner
(MaceNews) – Chicago Federal Reserve Bank President Charles Evans was upbeat about the economic outlook Wednesday, but said the Fed is still “some ways” from achieving its employment and inflation goals and therefore needs to retain its ultra-loose monetary policy stance.
Evans, a 2021 voting member of the Fed’s policy making Federal Open Market Committee, hailed the strong March employment report and said progress in fighting the corona virus, coupled with fiscal stimulus, bodes well for the future growth and employment. He also anticipated higher inflation.
However, he also stressed downside risks and uncertainties in a webinar hosted by the Prairie State College Foundation, and he expressed concern that inflation will rise only temporarily. So the Fed cannot afford to take its foot off the monetary accelerator, as far as he’s concerned.
“(W)we, as the monetary policy authority, still have some ways to go before we reach our dual mandate goals of maximum and inclusive employment and inflation that averages 2%,” Evans said in prepared remarks. “We also face many uncertainties and risks on the road ahead ….”
“(E)ven though the economy is recovering, we still have a long way to go before economic activity returns to its pre-pandemic vibrancy,” he elaborated. “Even after the very strong March employment report, at 6.0%, the unemployment rate is well above the 3.5% we saw on the eve of the pandemic. And many other workers have stopped looking for a job and exited the labor force.”
Evans told reporters he is “encouraged” by recent data, but wants to see forecasts of stronger growth “actually play out” before he would be “comfortable” enough to consider making monetary policy less easy. In particular, he said the economy would need to be “months into” an “overshooting of the Fed’s 2% target before he would be “comfortable” firming policy.
He said the Fed needs to be “patient” and “bold” in pursuit of its objectives.
Evans voted with other FOMC members March 17 to leave the federal funds rate in a zero to 25 basis point target range and to continue buying $120 billion monthly in Treasury and agency mortgage backed securities.
The FOMC again said “it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2% for some time.” And it said it would keep buying $120 billion per month of bonds “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
Evans saw the economy “poised for strong growth later this year, which will bring with it further significant improvements in the labor market.” He added that his outlook is “much more positive today than it was just a few months ago.”
But he proceeded to dampen his optimism about the Fed reaching its maximum employment and price stability goals.
Like many of his fellow policymakers, Evans predicted inflation will “increase in the coming months” – because of statistical reasons; rebounding consumer demand and “supply chain bottlenecks.”
But he questioned whether higher inflation will persist “once prices renormalize and supply chains adjust” or whether PCE inflation will return to its 1.4% pace of the past year. “To generate persistently higher inflation, we need higher inflation expectations—that is, we need to see households and businesses begin to incorporate a higher underlying rate of inflation into their decisions today and their plans for the future,” he said.
“Given the low inflation experienced over the past 15 years, it is highly likely that inflation expectations have drifted noticeably below 2%,” he continued. “If they stay there, then we will only see a temporary boost to inflation this year …..”
Citing the FOMC’s 2% average inflation objective, Evans said “if inflation has been running persistently below 2%, we need to have inflation overshoot our goal moderately for some time to bring the average back to 2%.”
In their March Summary of Economic Projections, FOMC participants forecast inflation will run 2.4% in 2021 (2.2% core), 2.0% in 2022, and 2.1% in 2023. But “after years of under-running our target, in my view those increases and, down the road, some even higher rates of inflation are needed to get inflation to average 2 percent and to solidify inflation expectations about that number,” he said.
“So, I see the need for continued accommodative monetary policy to reach our goal,” he added.
Unemployment was forecast to fall to 4.5% by the end of this year, 3.9% next year and 3.5% by the fourth quarter of 2023. Nevertheless, Evans did not seem hopeful about the FOMC reaching its “maximum employment” and 2% average inflation goals very quickly. “Judging from the most recent SEP, those conditions will not be met for a while….. So, policy is likely on hold for some time.”
Asked by MaceNews at what point he and his colleagues might need to reassess their policy stance if recent strong employment and purchasing managers data continue, Evans responded cautiously. “We’re all kind of itching to know what the answer is going to be,” he replied.
Evans noted that “strong fiscal support is coming on line” to supplement accommodative monetary policy and that “the vaccine roll out is going quite well.” So he said “everyone is optimistic about what the summer is going to look like…”
However, he said, “we want to see the data .… We want to see it actually play out.”
“Just because there is better forecasting doesn’t mean all of a sudden I’ve seen the data,” he went on.
Although inflation is likely to rise in coming months, “it’s going to take time to judge if that’s sustainable 2% inflation overshooting,” he said, adding that it’s going to be “months into (overshooting)… before I’m comfortable.”
Evans said further gains in wages must be “an important part of seeing inflation rise in the way I’d like to see.”
Evans said he was pleased with the March employment report, which included a 916,000 jump in non-farm payrolls on top of large upward revisions to prior months, and he said is “looking forward to more very strong job reports.”
But while “we’re moving in the right direction, still have quite a long ways to go,” he said.
In the week ahead of Evans comments, the 10-year Treasury note yield went as high as 1.7650%, compared to 0.9170% at the start of the year and as low as 0.3980% last March. In recent days, it has retreated to 1.67%. Meanwhile, stocks have been hitting record highs.
Asked about the steepening of the yield curve by a webinar participant, Evans called it “a good thing” and to be expected “when the economy is doing better.”
“The fact that (long-term) interest rates are going up is a sign people are optimistic,” he said, noting that so far “we’re going back to levels like we were experiencing in December 2019.”
Market gauges of inflation expectations have also moved higher. The five-year breakeven rate – the spread between yields on five-year Treasury notes and Treasury inflation-protected securities of the same maturity — has jumped from 1.98% at the start the year to 2.55% recently.
There again, Evans was encouraged, not disconcerted, saying “increasing inflation pressures” are “a good thing…”
Asked about the danger of excessive inflation, Evans told webinar participants he is “very confident the Fed will be adjusting policy if we see that,” but added, “that’s well into the future.”
Meanwhile, he said inflation of “2 ½%, even 3% would be welcome, frankly.”
He told reporters, “we really have to be patient and be willing to be bolder than most conservative central bankers be…if we’re going to get inflation expectations up.”
Evans said it is hard to “tease out” true inflation expectations from market data and said he would like to see confirmation from survey data that they are indeed rising.
While saying the Fed needs to maintain an accommodative monetary policy for the foreseeable future, Evans praised increased deficit spending. “We can do less ultimately because the fiscal authorities are doing more.”
Evans declined, when prompted by a reporter, to call financial markets “frothy,” but said the Fed is constantly monitoring them.