Evans doubts inflation rising; urges patience on Fed rate hike

By Jonathan Spicer

MILWAUKEE, Wisconsin (Reuters) - The Federal Reserve should leave interest rates near zero longer than planned and take an "extra patient approach" to tightening policy due to the risk that inflation will not rebound as quickly as expected, a top Fed official said on Monday.

Defending the dovish wing of the U.S. central bank, Chicago Fed President Charles Evans cited what he called "substantial costs" to prematurely hiking rates, including Fed credibility. He suggested it may take until mid-2016 to see enough evidence of inflationary pressure for a rates "liftoff."

After nearly seven years of near-zero borrowing costs, forecasts show most of the 17 Fed officials expect to begin tightening monetary policy later this year, including Chair Janet Yellen. Evans, who has proven influential in post-crisis policymaking, is among the three who want to wait until next year.

A "later liftoff and a gradual subsequent approach to normalizing monetary policy best position the economy for the potential challenges ahead," he said at Marquette University.

While the Fed has said it wants to be "reasonably confident" that inflation will rise from 1.3 percent now to a 2 percent goal, Evans said he needs to be convinced with "some evidence of true upward momentum in actual inflation."

"It could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation," he said in prepared remarks.

Even a modest U.S. rate hike could rock bond markets, hurt foreign currencies and suck capital from emerging markets. The Fed delayed the move at a meeting two weeks ago, citing worries of a global economic slowdown and market turmoil.

The forecasts suggest most Fed officials see a single rate rise this year, followed by about four further modest moves in each of the next few years. Yellen and others say they expect the pressure on inflation to dissipate as the dollar cools and as commodities bounce back.

Evans however predicted the Fed's preferred inflation measure will not rise to near 2 percent until the end of 2018.

Policy should be easy enough to push it above 2 percent, he said, adding a premature rate hike could suggest the Fed is not serious about hitting its target and also lead to a policy reversal if the economy stumbles.

(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)

You May Also Be Interested In

• Seagate forecasts higher Q4 profit on boost from cloud customers
• Analyst comments after lower than expect CPI in Japan impacts JPY
• Downside risks for EUR/USD have undoubtedly risen overnight - ING