Fed’s Evans Sees Early 2016 as Timeframe for Rate Increase

By Mark Peters and Michael S. Derby

LAKE FOREST, Ill.—Federal Reserve Bank of Chicago President Charles Evans said Wednesday the Federal Reserve should hold off until early 2016 to raise interest rates, saying that acting before inflation comes more into line with the central bank’s target could hurt its credibility.
The central banker, whose remarks came to reporters after a speech here, said he is going into this month’s meeting of the rate-setting Federal Open Market Committee, where he holds a vote this year, with an open mind. But he added that current data isn’t showing the uplift in inflation needed to convince him a rate increase this year is appropriate.
“June is a little bit early I would guess in the sense that there is not that many more months of data where we can see this kind of improvement,” Mr. Evans said. “Given the down draft to headline inflation from energy and commodity prices, it would be remarkable if core PCE [personal consumption expenditures] started reverting back to levels that I thought were more in line with that type of confidence.”
Mr. Evans said the Fed won’t get to its 2% price target until sometime in 2018, which would indicate the central bank could raise rates at some point in the first half of 2016. His opposition to a rate increase could put him in a dissenting role on the FOMC.
As for the central bank’s guidance, Mr. Evans said he doesn’t have strong views on the use of the word patient. Fed officials have said they would be “patient” before starting to raise rates, meaning no rate increase is likely at their next two policy meetings.
Mr. Evans said that he wants the central bank’s guidance to remain sufficiently conditional, adding that raising rates too early while inflation remains below the Fed’s target could hurt the credibility of the bank.
Mr. Evans described the economy as doing better and showing momentum even as unemployment still remains too high. But he said that alone shouldn’t result in a rate increase because inflation remains low, having fallen short of the central bank’s 2% price target for nearly three years.
The Federal Reserve has been moving toward a rate increase as unemployment falls and the economy shows signs of further strength. Federal Reserve Chairwoman Janet Yellen last week laid the groundwork for an interest-rate increase later this year and other central bankers have since echoed her message. The central bank has held its benchmark rate near zero for more than six years in an effort to boost the economy.
Mr. Evans said it remains unclear why inflation remains so low as the economy shows strength. “Around the whole world inflation is very low, and that’s a bit of a puzzle. We have got a better economy now, and you would expect inflation to start rising,” Mr. Evans said.
He added that inflation in the U.S. could become decoupled from other countries.