Fed should stand pat on rates, let inflation rise - Evans

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - After lowering U.S. interest rates twice this year, the Federal Reserve has reset monetary policy to where it can deliver on its 2% inflation goal despite risks to the economic outlook, Chicago Federal Reserve Bank President Charles Evans said on Tuesday.

Evans, 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 achieve its 2% inflation goal.

But rising trade tensions between the United States and China, geopolitical risks like Britain potentially crashing out of the European Union, and weakening growth in Germany and elsewhere put U.S. business spending and sentiment on the back foot and forced most at the Fed, including Evans, to reverse their thinking on rates.

"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 remarks prepared for delivery in Frankfurt on Tuesday. "I think this more accommodative stance is needed to support a roughly similar growth outlook to what I had anticipated before and, importantly, to support moving inflation up with greater assurance to achieve our symmetric 2 percent goal within a reasonable time."

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.

But rather than mark the start of an extended cycle of rate cuts, Fed Chair Jerome Powell has said the reductions represent a "midcycle adjustment" to policy designed to sustain the expansion.

Though some Fed policymakers believe more rate cuts will still be needed, Evans' remarks on Tuesday fully endorsed Powell's view.

Evans also suggested that the current policy setting could be aggressive enough to create not just 2% inflation but "could well result in inflation modestly overrunning 2% for some time." But in the face of falling inflation expectations by businesses and households, he said, "this would not be a policy error."

In subtle pushback against U.S. 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, which his staff currently estimates at about 1.75% a year and at risk of dropping lower amid "today's uncertain and hostile trade climate."

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