Chicago Fed President Charles Evans on Tuesday suggested that his support for another interest-rate hike this year is no slam dunk.
Evans, perhaps the most influential dove on the central bank, has voted for two rate hikes this year despite inflation remaining consistently below the Fed’s 2% target.
Read: Fed votes 8 to 1 to raise key U.S. interest rate
In an interview with CNBC, Evans explained that he supported the two rate hikes, one in March and the other last week, because the economic fundamentals look good and the central bank’s policy stance was still “accomodative” in Fed jargon, meaning helpful to the economy.
“I think the economy has been doing quite well,” he said.
But the Chicago Fed president suggested the next decision would be different.
“I think it is much more challenging from here on out,” Evans said, adding “the latest inflation data make me a little nervous.”
Evans said it was “very important to get inflation up” and average 2% over a long period of time.
Inflation has generally been below the Fed’s 2% target since the financial crisis. Consumer prices seemed on track to accelerate a bit at the start of the year, but have slumped since the spring.
Fed Chairwoman Janet Yellen told reporters last week the recent weakness was due to “one-off” factors, including cell-phone price drops. She said the current 4.3% unemployment rate would lead to an eventual acceleration in wage-driven inflation.
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Evans said he had some sympathy for Yellen’s views, but said something else might be at work that would require the central bank to hold off raising rates.
“In a world of global competition and new technology,” the marketplace is changing and could be putting pressure on price margins, he said. That would mean the Fed should not tighten more if it wants to get inflation up to 2%.
Inflation below target is a sign of lethargic demand in the economy.
Evans said that the central bank can wait for six months before deciding whether to raise rates again.
He noted the Fed has penciled in three rate hikes this year and has already made two moves.
“We can go until December and make a judgement that maybe three [rate hikes] is the right number or maybe two is the right number, and so I think we’ve got time to look at the data and see how things improve,” he said.
Evans said he wasn’t paying too much attention to the bond market, where yields reflect market doubt that the central bank will be able to raise interest rates much further over the next year and a half.
“I don’t think [the bond market] is a strong signal on the economy, yet,” he said. The U.S. 10-year note is the world’s safe-haven investment, he noted.
He said he wasn’t nervous about financial stability risks.
Evans said the Fed may go ahead before December and allow its massive $4.5 trillion balance sheet to run off.
“We’re probably pretty close to the point where we start running down the balance sheet,” Evans said.
Many Fed watchers think the Fed could take this step at its September meeting.