PEORIA, Ill. (Reuters) – A low interest rate environment sets limits on what the Federal Reserve can accomplish with monetary policy, making it important for the Fed to “proactively” cut rates when risks appear to provide a buffer for the economy, Chicago Fed President Charles Evans said Wednesday.
Evans said that when inflation is low, providing “too much accommodation” can help the U.S. central bank reach its inflation target sooner. In contrast, not acting strongly enough can cause inflation expectations to be anchored at low levels.
“In my view, these differences mean we need to err on the side of providing aggressive enough accommodation to get inflation moving up with some momentum,” Evans said in prepared remarks for an event hosted here by the Greater Peoria Economic Development Council.
Speaking to an audience of local politicians and business leaders, Evans stressed the importance of responding quickly to downside risks, making the case that the Fed could raise rates later if needed.
“Engineering a modest overshoot of our inflation objective better guarantees that we would actually meet our inflation target in the future,” Evans said. “Any excessive overshooting could be controlled with modest rate hikes.”
Evans supported the two interest rate reductions approved by the Fed in July and September and said Wednesday that he thinks monetary policy is “probably in a good place right now.” The U.S. central bank’s target rate is now at a level between 1.75% and 2.00%.
Last week, Evans said he would go into the October 29-30 meeting “open minded” about to whether rates should be adjusted in either direction.
(Reporting by Jonnelle Marte; Editing by Chizu Nomiyama)