Chicago Federal Reserve Bank President Charles Evans looks on during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico, February 27, 2020.
Chicago Federal Reserve Bank President Charles Evans looks on during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico, February 27, 2020. Reuters / Edgard Garrido

The Federal Reserve needs to raise interest rates this year and next to bring down high inflation before it gets embedded in American psychology and becomes even harder to get rid of, Chicago Fed President Charles Evans said on Thursday.

"Monetary policy must shift to removing accommodation in a timely fashion," Evans said in remarks prepared for delivery to the Detroit Regional Chamber, noting that the U.S. central bank's interest rate hike last week was the "first of what appears to be many" this year.

The U.S. 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 that 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 currently running at about 6%.

Much remains uncertain, Evans noted, particularly with the Ukraine crisis and the 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.