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Evans: Fed could raise rates 'a bit' past neutral level


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Evans: Fed could raise rates 'a bit' past neutral level

Inflation pressures due to a tight labor market could push the Federal Reserve to raise interest rates to a level where the central bank takes a restrictive stance, Chicago Fed President Charles Evans wrote.

That would mark a significant departure from the Fed's monetary policy approach over the past decade, when it has provided monetary stimulus by keeping interest rates lower. Evans wrote that economic growth is strong enough now that it is appropriate for the Fed to step back into a "role of supporting actor" and guard against a potential acceleration of inflation.

"Given an unemployment rate forecast below the natural rate, such a policy stance is quite natural and would be consistent with some moderation in growth and a gradual return of employment to its longer-run sustainable level," he wrote in a speech he prepared for a Central Bank of Argentina conference.

Evans does not vote this year on the Federal Open Market Committee but will vote again on the FOMC in 2019.

The Fed began gradually raising its benchmark rate in late 2015, with each 25 basis point hike moving the Fed's policy stance closer to a "neutral" level, where the Fed neither gives the economy an extra boost nor restrains it.

The Fed's current target for the federal funds rate is currently 1.75% to 2%. Fed officials' projections of the neutral rate vary significantly, though their median projection in June put it just below 3%.

Fed officials have begun weighing their options on what they do once they hit the neutral level. Some, for example, have said they want the Fed to pause once they approach that mark.

Evans said he thinks the Fed should keep raising rates to move policy "toward a neutral setting and then likely a bit beyond neutral to help transition the economy onto a long-run sustainable growth path," with inflation at the Fed's 2% goal. It could go faster than that if the economy shows signs of overheating, but it could also take a slower approach if factors like uncertainty over trade lead to lower growth, Evans said.

Earlier in the day, New York Fed President John Williams said he continued to favor the Fed's gradual path of rate hikes, despite the recent flattening in the yield curve.