Why This Fed President Says Monetary Policy Needs To Be 'Much Closer To Neutral'

While Chicago Federal Reserve Bank President Charles Evans was wrong in assuming inflation would be transitory, he's optimistic about the strength of the economy, he said Monday in Detroit. 

Certain goods, cars, furniture and energy prices are driving the Consumer Price Index number higher, Evans told Detroit Free Press columnist Susan Tompor in a Monday discussion before the Detroit Economic Club.

Evans On Interest Rates: Evans describes neutral monetary policy as interest rates somewhere in the 2.25%-2.5% range. While the Fed president said he does expect prices to remain high in the short term, he is optimistic the economy will continue to grow during the interest rate hikes, leading to a more stable and neutral economy. 

A half-point interest rate rise is on the table if it helps get the economy to neutral by next March’s Fed meeting, he told Tompor. 

Evans On Automobile Sticker Shock: Supply chain issues, specifically surrounding semiconductor chips, have been a large cause of unusually high vehicle prices, the Fed president said. 
“Car companies delayed their orders in spring of 2020 when no one knew if people would be buying cars,” Evans said. “Then, before very long, other companies had put in orders for chips before them.” 

Car companies have struggled to procure chips to meet their demand, driving prices higher, he said. Evans said he expected the supply chain to be more resilient, and mentioned other unforeseen headwinds such as the Russian invasion of Ukraine and recent COVID-19 surge in China. 

Related Link: Economists Expect Fed To Hike Rates Aggressively In Coming Months: Reuters

Why Chicago Fed President Is Optimistic: Despite these headwinds, the U.S. economy remains in a strong position, Evans said, adding that he does not expect the economy to stop growing as interest rates are raised. 

“We need to position monetary policy much closer to neutral,” Evans said.

“We don’t need an emergency setting of monetary policy anymore. The economy is doing well [and] the labor market is at 3.6% unemployment. We might see a quarter of not-so-great growth partly because of omicron and other issues, but I think the economy should do well and a neutral setting of monetary policy will be consistent with growth and a vibrant labor market." 

Related Link: Jamie Dimon: 'The Fed Should Not Worry About Volatile Markets Unless They Affect The Actual Economy'

Charles Evans speaks at the Detroit Economic Club on Monday. Photo by Jeff Kowalsky.