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 Raising rates earlier, whether to head off the risk of financial
instability or unacceptably high inflation, could dangerously
depress already low inflation and derail a recovery that is finally
gaining steam, Chicago Federal Reserve Bank President Charles Evans
said in remarks prepared for delivery in Hong Kong.
"I currently expect that low inflation and still-high unemployment
will mean that the short-term policy rate will remain near zero well
into 2015," Evans said. "(B)y the time the policy rate increases, it
will have been near zero for about seven years."
The Fed has kept rates near zero since December 2008 and bought
trillions of dollars of long-term securities to push down
unemployment, which rose as high as 10 percent in the aftermath of
the recession.
Now that the jobless rate has fallen to 6.7 percent, the Fed has
begun dialing down its massive bond-buying program.
Last week, policymakers said they would trim their monthly purchases
to $55 billion from $65 billion, and reiterated plans that put them
on track to wind down the program before the end of the year.
But the Fed has also said it will keep rates low for a "considerable
time" after it ends the bond-buying, because despite the
improvement, too many Americans who want to work remain out of a
job.
Last week, Fed Chair Janet Yellen roiled financial markets by saying
that after the Fed wraps up its bond-buying, likely by this fall,
rate rises could come around six months later.
Evans on Friday made it clear he expects the Fed to need to keep
rates low for much longer than that.
The U.S. economy grew at a 2.6 percent pace in the fourth quarter,
and despite a severe winter that slowed growth in early 2014, most
economists and Fed officials expect the momentum to pick up in
coming months.
But despite the improvement — in no small part due to help from Fed
policies, Evans noted — inflation by the Fed's preferred gauge is
just 1.1 percent, well below the central bank's 2-percent target.
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Evans said there are no signs inflation is set to rise, as many had
warned would happen if the Fed continues to pin rates at zero.
"If the Fed embarked prematurely on more restrictive monetary policy
conditions, these adverse actions would work to reduce inflation to
further unacceptably low levels," he said.
Nor should the Fed use a rate increase to combat the potential for
"financial exuberance," Evans said.
Several Fed policymakers, notably the influential Fed Governor
Jeremy Stein, have argued recently that monetary policy should be
less accommodative when risks to financial stability are on the
rise.
"I am not saying that financial stability concerns are not relevant
for the economy or that policymakers should not take decisive action
against developments that threaten financial stability," Evans said.
"Rather, I am saying that the macroprudential tools available to
policymakers are better-suited safeguards to addressing financial
risks directly."
(Writing by Ann Saphir; editing by Ken Wills)
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