WASHINGTON – A member of the Federal Reserve’s interest-setting committee said Wednesday it would be appropriate for the central bank to announce next month that it will begin trimming its $4.5 trillion balance sheet, but wait until December before raising a key interest rate again.
Charles Evans, the president of the Fed’s regional bank in Chicago, said he does not expect the balance sheet reduction to make much of a market impact because the move has been “well-choreographed.”
Speaking to a group of reporters, Evans added that he believes waiting until December to raise rates would give the Fed time to assess whether inflation is moving back toward the Fed’s 2 percent annual target.
Evans joked that he would like to see inflation rise above the Fed’s 2 percent target “at some point in my Fed career.” Evans, who has a vote on the Fed’s nine-member policy committee this year, is viewed as a leading “dove” – a group of Fed officials who believe it is important to push unemployment as low as possible as long as inflation remains under control.
The Fed’s two goals are to pursue interest rate policies that foster maximum employment and price stability. The central bank has succeeded on the employment front with the jobless rate now at a 16-year low of 4.3 percent, but it has had trouble lifting prices to what it considers an optimal rate of 2 percent annual increases.
In fact this year, the Fed’s preferred measure of inflation has been backtracking, dropping to a 12-month increase of 1.4 percent in June, below the 2.2 percent 12-month gain the inflation gauge had hit in February.
Evans told reporters at a breakfast session at the Chicago regional bank that he agreed with Fed Chair Janet Yellen that the decline stems from a number of temporary factors, including a price war for mobile phone plans.
The Fed’s next meeting is Sept. 19-20, with the last two meetings of the year on Oct. 31-Nov. 1 and Dec. 12-13.
Evans said that “unless the data and the forecast change dramatically” he believed the Fed could wait until December before moving again to boost its benchmark rate, which is currently at a still-low level of 1 percent to 1.25 percent.
The Fed in June released a plan that would begin the bond reductions at a monthly pace of up to $10 billion and then gradually increasing that level. In July, the Fed said that it expected to begin the bond trimming later this year. Evans said he believed it was “quite reasonable” to use the September meeting to announce that it was starting the bond reductions.
The Fed’s $4.5 trillion balance sheet is five times larger than it was when the financial crisis hit with force in the fall of 2008. The bond purchases were designed to put downward pressure on long-term interest rates as the Fed employed a number of unusual measures aimed at pulling the economy out of the worst recession since the 1930s.
The move to reduce the Fed’s holdings of Treasury bonds and mortgage-backed securities is expected to prompt modest increases in long-term rates, including mortgage rates.
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