CHICAGO — Charles L. Evans, president of the Federal Reserve Bank of Chicago, isn't convinced that the Fed should raise its benchmark interest rate in December, as many expect it will.
Other Fed officials, including the chairwoman, Janet L. Yellen, favor a rate increase, and financial markets regard it as a lock. But Mr. Evans is worried about the slow pace of inflation. He says the Fed needs to show it is serious about driving inflation back up to its target 2 percent annual pace.
"Is there really a hurry to raise rates?" he asked in an interview. "What if we just decided to wait until the middle of the year and if we saw inflation pick up, then we could do something? I would say at the moment I think the current decision is really a judgment call."
The interview was conducted last week; Fed officials are not allowed to comment publicly on monetary policy in the week before a meeting of the Federal Open Market Committee.
In questioning whether the Fed is doing enough to revive the economy, Mr. Evans is reprising a role he has played repeatedly since the financial crisis. At times, he has succeeded in persuading his colleagues to do more. It remains to be seen whether he will again prove prescient in his concerns, or whether inflation will rebound in the months ahead.
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The conversation has been edited for brevity and clarity.
How goes the economy?
I think the economy is doing very well. I think it continues to show strength. The second half is looking like very good growth: 2.5 to 3 percent growth. And this is to be measured against our assessment that sustainable growth is more like 1.75 percent. So 2.5 to 3 percent is very strong growth, which should continue to lead to improved labor market activity.
Unless something structural improves to increase trend growth, we're going to be decelerating to something under 2 percent — and that will still be a pretty good economic picture.
Should the Fed raise its benchmark interest rate in December?
I've been looking at the data, and the data have not been strongly indicating that we should continue with a rate increase. I do worry that inflation expectations have not yet moved up in a noticeable way that I think is on the path to being more consistent with 2 percent. I'm going to be listening to everybody, but I don't think that the call is obvious at this point.
Why does inflation remain below the Fed's 2 percent annual target?
One of the things that makes me nervous is that longer-term inflation expectations have moved down over the last few years. I think that makes it more challenging to get inflation up to 2 percent. I think everybody is mindful that you don't want inflation to get out of hand. Having said that, we've now gotten to the point where low inflation as an objective is extremely credible. We've gained a lot of credibility, and I don't think markets or the public are expecting central bankers to let inflation get out of hand. I think we've got a bit of a reverse problem. We haven't demonstrated with our actions that 2 percent isn't a ceiling.
What steps should the Fed take to strengthen inflation expectations?
I think our policy moves to date have been thoughtful and reasonable. We've increased our funds rate objective by 100 basis points. Maybe it's time to stop and see whether inflation expectations are going to move in line with our 2 percent objective. And if the judgment was that we're still likely to be underrunning our 2 percent objective, maybe we would stop briefly and assess for more information, maybe wait until mid-2018.
Janet Yellen has said that until this year, the weakness of inflation has not been surprising. You've described a longer-term problem.
If we'd said four or five years ago, "What's going to be the hardest thing — getting unemployment down to our objective or getting inflation up to our objective?" I think a lot of people would have said that inflation was going to be easier.
But my point is really more about the future dilemmas that we're going to be facing. At some point, something is going to happen and we're going to need to address a downturn or a weakness in the economy. I worry that as we get down to the zero lower bound and we have to trot out other tools, we're going to be relying on the public and markets to believe we're going to follow through and get inflation up to 2 percent. If we don't live up to it this time, I think it's even harder to get that message across and our tools would not be as effective. I look at the Bank of Japan, and they have struggled for decades with this type of credibility issue.
You've also suggested that concerns about financial stability are not a good reason to raise interest rates. Why not?
I do take seriously that if we have overly accommodative policy — even in an attempt to get inflation up to our objective — then we're somehow providing the means for the financial sector to lever up a bit, particularly if we don't have the right prudential standards in place. It just seems to me that it would be much better if we used our other tools, supervision, that would allow our monetary policy tools to address our inflation and employment goals.
Are those other tools strong enough?
There are few really good examples of macroprudential policies that central banks have brought out over time. I think in spite of that, what the regulators do in talking to the institutions is really very helpful, and those are the tools we need to pursue. We have to have a culture of reasonable regulatory approaches that are balanced so that businesses and consumers can go out and meet their needs. It's not uncomplicated, but that's what goes with the territory.
Does the Trump administration's aversion to regulation lead you to think that you may need to lean more heavily on raising rates?
I know that the president is going to make some appointments to the Federal Reserve Board. I'm confident that that board will look at everything carefully and implement what I think are appropriate policies. I think that's the way policy has to be made and proceed. That's where the authorities lie. I'm hopeful that good, quality people will be put in place that look at the risks.
You've served on the Fed's policymaking committee for the last five years with Jerome H. Powell, Mr. Trump's nominee as the next Fed chair. What are your impressions?
I've always enjoyed and benefited from working with Janet Yellen, and I thought she was just an extremely outstanding Fed chair. But presidents get to come in and make their appointments, and I think Jay will be extremely good. He's been involved in everything for the last five years. He's got a lot of knowledge. He also knows something about our quirkiness. I think that's a benefit.
You've recently suggested that it's time for the Fed to start thinking about how it will respond to the next downturn.
I think what we need to at least consider is, what should the strategic framework look like going forward? For me, the take-away is we really need to work on these things. We need to get to the point where we understand the frameworks.
Is that happening?
I think we're having discussions about this. This takes the form of various parties saying, "We should talk about this." The minutes periodically will talk about a special memo. I don't think anything has risen to the point where I'd say, "Yes, this is a long discussion about the alternative strategy for the future." I think it would be natural for the Fed chair, particularly a new Fed chair, to entertain discussions like that.
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