FRANKFURT (Reuters) - The Federal Reserve has set monetary policy to where it can deliver on its 2% inflation goal and there is scope to raise rates slightly over the next few years if the economy continues to grow, Chicago Fed President Charles Evans said on Tuesday.
The Fed has cut rates twice this year as U.S. businesses were hit by rising trade tensions with China, political risk including Britain’s chaotic divorce from the European Union, and weakening economic growth in Germany and elsewhere.
Evans said this was setting inflation on course to accelerate to 2.2% by 2021 while the U.S. economy would continue to grow according to its long-term trend, creating leeway to raise the Fed’s key interest rate over the next few years.
“In that environment I have the Federal Funds Rate inching up a little bit through the end of our forecast period,” Evans told reporters in Frankfurt.
This would leave the benchmark “just a little bit below what I think is the neutral (rate)”
Fed Chair Jerome Powell said recent rate cuts represented a “mid-cycle adjustment” to policy designed to sustain the expansion.
Though some Fed policymakers believe more rate cuts will still be needed, Evans endorsed Powell’s view on Tuesday.
“I concluded that the situation called for us to cut policy rates 50 to 75 basis points below the long-run neutral rate and then leave policy on hold for a time,” Evans said in a speech at a regional office of Germany’s central bank.
He, like many of his colleagues, had as recently as December thought that with unemployment near 50-year lows the Fed could raise rates to above 3% this year and still hit its 2% inflation goal.
The Fed’s July and September rate cuts brought the Fed’s target range for overnight borrowing costs to 1.75%-2.00%, below the 2.5% that most Fed policymakers view as “neutral” in a healthy economy.
Evans also suggested that letting inflation modestly overrun 2% for some time “would not be a policy error” in the face of falling inflation expectations by businesses and households.
Pushing back against President Donald Trump’s calls for the U.S. central bank to slash rates to zero or below, Evans emphasized the limits of Fed policy. Lowering rates, he said, cannot do much to boost the underlying growth potential of the economy amid “today’s uncertain and hostile trade climate.”
Additional reporting by Ann Saphir; Editing by Sandra Maler and John Stonestreet