Fed's Evans says rate hike path, not liftoff timing, is key

MILWAUKEE (Reuters) - A Federal Reserve policymaker who has long called for deferring interest rate hikes until next year appeared to soften his stance on Friday, saying that what really matters is that increases, once begun, must be very gradual.

"While I favor a somewhat later lift off than many of my colleagues, the precise timing for first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process," Chicago Federal Reserve Bank President Charles Evans said in remarks prepared for delivery to the CFA Society Milwaukee.

When the Fed does raise rates, he said, it is "critically important" that it tells markets clearly that rates hikes will be gradual. Failure to do so could leave investors with the impression that the Fed won't keep monetary policy easy enough to lift inflation back to the Fed's 2-percent goal within a few years, he said, a result he would view "as an important policy error."

The Fed has kept rates near zero since December 2008, and most Fed officials believe the economy is strong enough to begin lifting rates this year. While investors have fixated on the likely timing of that decision - whether at the Fed's October or December meeting - Evans comments signaled that the rate hike debate is a much broader one.

Evans said Friday that in his view it could "well be appropriate" to have rates still below 1 percent by the end of 2016. While that view is consistent with current expectations based on interest-rate futures, it is a departure from the majority of Fed officials, who expect rates to be well above 1 percent by the end of next year.

Evans spent most of his speech Friday repeating an argument he has long made: with inflation as low as it is, the Fed should be extra-patient in removing monetary stimulus so that it doesn't have to backtrack if its rate increases undercut the recovery it has worked so hard to nurture.

He did not latch on to the weaker-than-expected September jobs report to bolster his argument, saying that it did not change his confidence that the U.S. economy will reach full employment in a reasonable period of time.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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