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The Fed: Fed’s Evans says key U.S. interest rate to go to 2.5% — and likely higher

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The president of the Chicago Federal Reserve suggested a key U.S. interest rate could be raised to as high as 2.5% by year end as the central bank tries to tame high inflation.

“If we get to 2.25% to 2.5% rates by December, we will be able to look at where inflation is,” Charles Evans said in a talk at the Economic Club of New York. That’s the range the Fed considers “neutral” for the economy.

He also indicated the Fed could raise rates by 1/2-point increments at least a few times this year, with the potential that the benchmark fed funds rate could eventually top 3%.

Evans is the latest in a long line of senior Fed officials who’ve made it clear they plan to raise rates quickly this year after the yearly rate of inflation shot above 8% for the first time in 40 years. He is not a voting member this year of the bank’s interest-rate setting panel, however.

The central bank kept its short-term fed funds rate near zero through the entire pandemic until raising it for the first time last month. The Fed also plans to reduce its $9 trillion balance sheet as part of its goal to raise long-term rates.

Evans contended the Fed can raise rates without doing much harm to the economy. Higher rates make it more expensive to buy a car or home or take out a business loan.

He predicted the U.S. economy would continue to expand, though at a somewhat slower pace, over the next year.

Rarely has the Fed succeeded in reducing similarly high bouts of high inflation without inducing a recession, however.

The rate of inflation as measured by the consumer price index climbed to 8.5% in the 12 months ended in February from just 1.7% one year earlier.

If the Fed raises rates to 2.5% by year end, Evans indicated the Fed could reexamine the economy and inflation to see how much further it needed to go.

“We are moving to adjust it [the fed funds rate] to ‘normal’ and then we will see,” he said.

Just as the Fed got caught by surprise by high inflation, Evans said, it’s possible the economy could look a lot different a year from now and also require a different response from the central bank.

Still, Evans said it’s unlikely inflation would fall enough on its own without tougher Fed medicine.

Supply-chain bottlenecks that were seen as the chief cause of rising inflation early on, for one thing, are unlikely to entirely fade away by next year, he said. And the labor market could remain tight and keep upward pressure on wages for a while.

“The problem is, it [high inflation] is likely to persist if the Fed doesn’t do anything,” he said.

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