Fed’s Evans: Rate Hikes ‘Some Time Down the Road’

By Michael S. Derby
While interest rate hikes lie some time off, it’s likely a future tightening cycle will have to be more aggressive than what was seen over the last cycle of raising rates.

“We are going to want to be more aggressive” compared with the tightening cycle that occurred between 2004 and 2006, Federal Reserve Bank of Chicago President Charles Evans said Wednesday.

That tightening cycle was referred to as gradual and occurred in modest, steady increments. Evans said the pace of action then was not a major driver of the housing and financial market problems that ended up causing the recession. Instead, the official said that the Fed could have likely reached the end point of its rate hike cycle more quickly and that bigger rate hikes would not have been particularly harmful to the economy.

Evans also said that when it comes to rate hikes and major unwinding of other emergency support programs now, a shift lies “some time down the road.” In reaching a determination of whether rate hikes are needed, Evans said that “we are going to be looking very carefully at how the economic recovery is preceding,” and will be watching inflation and unemployment measures.

“As the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively,” Evans said. When the time does come to raise rates, “we could have a pretty reasonable withdrawal of accommodation.”

Most Fed officials who have spoken recently have offered similar sentiments, and indicated the current zero percent interest rate policy stance will be maintained for some time, likely into 2010.

Evans added that he would prefer to see inflation at 2% and noted “at the moment we are under-running that,” amid price pressures that are “relatively muted.”

Evans sees inflation ranging around 1.5% and said expectations for future price gains are “pretty anchored.” He also said “neither a harmful deflationary episode nor a repetition of the Great Inflation [from 1965 to 1982] is very likely.”

The official said more broadly, the recovery “is beginning to start” and growth is likely to range around 2.5% to 3% into next year.

Evans was speaking before a gathering held by the Council on Foreign Relations in New York. The policy maker is a voting member of the interest rate setting Federal Open Market Committee. He spoke as the economy appears to be emerging from the worst recession since the Great Depression, amid continued trouble in labor markets.

He foresees continued trouble in the employment sector, and reckons the unemployment rate, now at 9.7%, will breach 10% before moving downward.

Evans expects the central bank to buy all the mortgage-backed securities it said it would buy, even as the economy shows signs of recovering.

“It’s a fair question” to ask if the Fed needs to buy all the securities it had originally planned to buy. “I would expect we continue with the entire amount” given the beneficial impact the program has had so far, Evans said.

He was referring to the Fed’s plans to buy up to $1.25 trillion in agency mortgage-backed securities and $200 billion in agency securities. The Fed will wind up a program to buy $300 billion in Treasury debt in October, having extended the buying period but not the size of the effort.