By Ann Saphir
(Reuters) – It is time for the Federal Reserve to shift to smaller interest rate hikes to avoid tightening monetary policy more than needed, and slow the pace further once risks become more “two-sided,” Chicago Fed President Charles Evans said on Friday.
“From here on out, I don’t think it’s front-loading anymore, I think it’s looking for the right level of restrictiveness,” Evans told Reuters in an interview, referring to the U.S. central bank’s string of supersized rate hikes.
“Stepping down to a pace that’s not 75 (basis points), giving the (Federal Open Market) Committee a little bit of runway to see more data before you get too far ahead of where you eventually want to be, makes sense to me.”
The Fed on Wednesday delivered its fourth straight 75-basis-point interest rate increase, bringing the policy rate to 3.75%-4.00%, as part of an effort to “expeditiously” get borrowing costs high enough that they begin to slow growth and bite into inflation.
Evans said he supported this week’s move, and also expects the Fed to eventually need to raise its benchmark overnight interest rate “slightly higher” than the 4.50%-4.75% range he and many of his fellow policymakers had previously thought would mark the peak of the current tightening cycle.
But the Fed should now pull back on the pace of its rate increases, given that tighter policy will likely only bring inflation down slowly, he said, echoing, but with a slightly more dovish emphasis, the view Fed Chair Jerome Powell laid out earlier this week.
“There’s ample capacity” to tighten monetary policy even at a slower pace, he said. “We have accomplished front-loading and now we are at the point where we are looking for the right level of restrictiveness and mindful of data dependency in a world where inflation just lags more than the real economy.”
The Fed’s preferred measure of inflation is running at more than three times the central bank’s 2% target. It isn’t expected to return to that target for a couple of years, even in the face of the Fed’s most aggressive rate-hike campaign since the 1980s.
“If it were the case that the Committee still saw the need to increase rates expeditiously, because inflation reports weren’t as favorable as we would like, you can do 50 (basis points), repeatedly, and in four meetings you’ve increased by 200 basis points,” Evans said.
But the Fed would also be in position to downshift from 50-basis-point to 25-basis-point hikes if it needed to, he said.
“You’ve got to be close enough to where you kind of think it’s not that much further, or it becomes very much two-sided. You are looking for the point where you’ve got two-sided risks,” Evans said. “I think most people would say at the moment it’s not two-sided: inflation reports are likely to still be disappointing even if they begin to improve.”
(Reporting by Ann Saphir; Editing by Paul Simao)
