Fed's Evans Backs 'Timely' Rate Hikes, But Says Careful Touch Needed

The Federal Reserve needs to raise interest rates "in a timely fashion" this year and in 2023 to curb high inflation before it is embedded in U.S. psychology and becomes even harder to get rid of, Chicago Fed President Charles Evans said on Thursday.

But Evans also said the U.S. central bank should tread carefully as it tightens monetary policy in the face of price pressures that have pushed inflation to a 40-year high.

"I just think that we want to be careful" not to raise interest rates too abruptly, and instead take the time to assess whether supply chains are improving and how the war in Ukraine is affecting the economy, he told the Detroit Regional Chamber.

Evans spoke a few days after Fed Chair Jerome Powell said there was nothing that would necessarily stop the Fed from raising interest rates by 50 basis points at its next meeting, after its first quarter-percentage-point rate hike last week, to get a better edge against inflation.

"My own view is that, given the pressures that I see, I will be comfortable with ... increasing by a quarter (of a percentage point)" at each policy meeting this year, and through March of next year, Evans said. "Maybe a 50 helps - I'm open-minded about that," he said, adding that the larger discussion will be around what to do once the Fed's policy rate reaches the neutral level at which it neither brakes nor stimulates the economy.

The economy has momentum, labor markets are "downright tight" by some measures, and rapidly rising inflation sparked by pandemic-related factors is now showing up broadly across the economy, Evans said.

"This is a signal of more general pressure from aggregate demand on today's impinged supply," Evans said. "If monetary policy did not respond to these broader pressures, we would see higher inflation become embedded in inflation expectations, and we would have even harder work to do to rein it in."

Data released earlier on Thursday showed just how tight the U.S. job market is, with the Labor Department reporting that new filings for unemployment benefits had fallen last week to the lowest level since September 1969. In the prior week, the total number of people continuing to collect jobless benefits after their initial claim was the lowest since January 1970, when the labor force was half the size it is today.

Fed policymakers as a group signaled last week they expect to raise the benchmark overnight interest rate by the equivalent of seven quarter-percentage-point rate hikes this year and three more times next year, a view Evans said on Thursday he shares.

Those actions, along with reductions in the Fed's balance sheet, will help bring inflation down closer to the central bank's 2% target over coming years, he said. Inflation by the Fed's preferred measure is running at about 6%.

Much remains uncertain, Evans noted, particularly with the Ukraine crisis and the COVID-19 pandemic both posing unknown upsides risks to inflation and downside risks to economic growth.

"Policymakers need to be cautious, humble, and nimble as we navigate the course ahead," Evans said. "Monetary policy is not on a preset course" but will be decided at each Fed meeting, taking economic data, financial conditions, and risks into account.