Chicago Federal Reserve Bank President Charles Evans reiterated Monday his preference for delaying liftoff until 2016 saying he wants to see confirmation the first quarter's weakness was indeed transitory and inflation moving back toward the Fed's 2% target.
"In my view, it likely will not be appropriate to begin raising the federal funds rate until sometime in early 2016," Evans said in a speech prepared for the Columbus Economic Development Board's Annual Meeting.
Evans, who is a voter this year on the Federal Open Market Committee, has previously hinted he is one of two FOMC members who see liftoff in 2016 as opposed to 15 members who see it happening this year.
"Given uncomfortably low inflation and uncertainties about the economic environment, I see significant risks, but few benefits, to increasing interest rates prematurely," he said Monday.
One risk is "that we begin to raise rates only to learn that we have misjudged the strength of the economy," he said. "In order to rekindle growth and boost inflation, we would have to cut rates back to zero and possibly resort to unconventional, second-best policy tools."
Evans did outline some of the economic conditions he would like to see before raising rates off the zero lower bound where they have been since December 2008.
First, "it goes without saying that we need to see continued improvements in labor markets and solid GDP growth," he said. "Even though we have made great strides, the economy has not yet returned to full employment, and we must be confident that growth will be adequate to get there."
Second, Evans said he wants to see inflation moving back towards target within the next one to two year timeframe, a conditions he has spoken of before. "I see no compelling reason for us to be in a hurry to tighten financial conditions before then," he said.
"Of course, given the lags in how monetary policy influences the economy, this means the first rate hike will occur based on a forecast," he said.
Another "simple but powerful signal" of inflation moving back towards target "will be if we start seeing a pickup in the year-over-year rate of change in the price index for PCE inflation excluding food and energy," he said, calling this index "the single best predictor of where total inflation will be a year from now."
So, he added, "I would feel more confident about my inflation outlook if core PCE inflation began to rise in a sustainable fashion."
Evans said he would "also want to see stronger growth in wages and other forms of labor compensation," as well as a rise in inflation expectations.
"I also would feel more confident about the inflation outlook, if either inflation compensation picked back up or we had more evidence that the drop in compensation was due to benign technical factors," he said.
Evans sounded pretty upbeat about other parts of the economic outlook, saying "economic activity appears to be on a solid, sustainable growth path, which, on its own, would support a rate hike soon."
But he pointed out "the weak first-quarter data do give me pause, and I would like to see confirmation that they are indeed a transitory aberration."
Similar to output growth in the first quarter, he said, "we think the more subdued pace of job gains in March will prove to be transitory." March nonfarm payrolls grew by just 126,000 jobs after 12 months of above 200,000 gains. The April report is due out Friday.
Looking ahead, he expects 2.5% to 3% output growth and average job gains to remain above the 200,000 mark for "a while longer before gradually moving back down toward its longer-run trend." For his longer term forecast, Evans said he see the natural rate of unemployment at 5%.
But in his economic outlook "inflation is low and is expected to remain low for some time," he said.
In fact, Evans sees inflation rising "at a pretty gradual pace," he said, and only returning to the Fed's 2% target in 2018. "That's a pretty slow increase," he said. "Furthermore, there are downside risks to my projection."
Those risks, he said, include the stronger dollar, "which has reduced the prices of imported products we buy."
Also, "the dramatic decline in oil prices has lowered the costs of energy related items, albeit as it also has bolstered the real spending capacity of consumers and businesses," he added.
Evans said, while it is not in his baseline forecast, "if the lower pricing gets embedded more persistently in the longer-run inflationary expectations of households and businesses, it would be even harder to get inflation back to its 2% target."
Such a drop in inflation expectations "is a downside risk that we need to be on the watch for," he said.
He points out that "there are a number of simple observations that suggest the current level of the federal funds rate relative to the natural rate is not overly accommodative."
Namely, "we still have resource slack, there is no meaningful upward momentum in inflation and instead of investing businesses are sitting on piles of cash or distributing it to stockholders -- a sign that they think the real rate of return on prospective investment projects is quite low," Evans said.