The Federal Reserve may "eventually" have to take a restrictive stance on monetary policy if tight labor markets meaningfully push up inflation, Chicago Fed President Charles Evans said Jan. 9.
Evans, who will vote on the Federal Open Market Committee this year, said in a speech in Illinois the incoming economic data "generally continue to be strong," pointing to an above-consensus jobs report showing the U.S. added 312,000 jobs in December 2018 as one example.
There are several clouds on the horizon, Evans said, echoing Fed colleagues who have increasingly described the uncertainties around the economic outlook. On Jan. 4, for example, Fed Chairman Jerome Powell said the central bank was "listening carefully" to market concerns over decelerating global growth.
The uncertainties include ongoing trade talks between the U.S. and China, the "near-term risk of a prolonged government shutdown," the potential for a disorderly Brexit and an overall tightening in financial conditions, Evans said.
But if those "downside risks dissipate and the fundamentals continue to be strong, I expect that eventually the fed funds rate will rise a touch above its neutral level," Evans said in prepared remarks.
Surpassing the so-called neutral rate would mean that the Fed would no longer be giving the economy an extra boost through lower rates and would instead begin holding the economy back. The most recent median projection from Fed officials put the neutral rate at 2.8%, slightly higher than their current target range for the federal funds rate of 2.25% to 2.5%. Evans said eventually increasing their benchmark rate to a range of 3% to 3.25% would be an option.
Fed officials, including Powell, had mentioned going above neutral as a possibility a few months back. But that talk has generally dissipated amid the recent swings in the stock market and concerns that tariffs are starting to weigh on the economy.
In a separate speech Jan. 9, Atlanta Fed President Raphael Bostic said companies appear to be increasingly cautious about their expansion plans, a development that would likely "act as a natural governor, limiting inflationary forces without the need for a muscular stance of policy." But he also added he is "not taking this outcome for granted" and will monitor incoming data to see whether that is happening.
Right now, Bostic said he sees "little need to engage in restrictive monetary policy and push the federal funds rate above a neutral stance."
"To me, the appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook," he said.
Bostic voted for the Fed's four rate hikes in 2018 but rotated out of an FOMC voting spot this year.