STOCKHOLM (Reuters) - The Federal Reserve may need to cut interest rates if the U.S. economy softens, Chicago Fed President Charles Evans said on Friday in remarks that focused on his concern over persistently weak inflation.
Evans, who has a vote on interest rate policy this year, said it’s also possible that economic growth and inflation will outpace expectations, pushing the U.S. central bank to raise interest rates “over time.”
But he said he was more worried about a scenario in which the economy underperforms.
“Then policy may have to be left on hold - or perhaps even loosened,” Evans said in prepared remarks for an appearance at a conference in Stockholm hosted by the Swedish central bank and the U.S. National Association of Business Economics.
Evans has been a strong proponent for the Fed’s self-described “patient” approach to holding rates steady.
He has also discussed over the past month the possibility of rate cuts, remarks that differ in tone from Fed Chairman Jerome Powell’s comments on Wednesday that there is no strong case for moving rates up or down.
Evans on Friday said he was increasingly concerned about the weakness this year in inflation excluding food and energy. He said temporary factors could be at work, but that it was also possible “underlying inflation trends may be mired below 2 percent,” the Fed’s targeted rate of price increases.
He said the Fed might need to change its interest rate policy to manage its risks.
“At times, we may want to adjust policy as insurance against bad outcomes,” Evans said.
He added that it was crucial the Fed act in a way to convince the public it will keep inflation centered at 2 percent, and that he would be comfortable if so-called core prices rose as high as 2.5 percent.
Anchoring inflation expectations around 2 percent would make it easier for the Fed to use potential new policy frameworks such as price-level targeting, which policymakers will be discussing this year.
Evans said the Fed might also consider concentrating its holdings of U.S. bonds in short-term Treasury securities. That could give the central bank the ability to stimulate the economy in future downturns by shifting its holdings to long-term securities, a strategy that would not require expanding the size of its balance sheet.
That approach, however, could have unintended consequences and would require careful study, he said.
Reporting by Johan Ahlander in Stockholm; Additional reporting by Jason Lange in Washington; Editing by Paul Simao