PCE inflation should be allowed to run above 2%, Fed's Evans says

The US central bank should be willing to allow inflation to run moderately above its target and say so clearly, a top official said.

In remarks prepared for a speech at the UBS European Conference in London, the president of the Federal Reserve of Chicago voiced concern that "persistent" factors were weighing on inflation, not "idiosyncratic transitory" ones.

Specifically, Charles Evans believed people's inflation expectations, a key determinant of wage demands and firms' pricing, had drifted below the Fed's symmetric 2% inflation target.

So while the economy was on a "solid" footing and momentum would likely extend into 2018, the news on inflation "has not been as good".

Indeed, having stuck to a prediction since 2013 for inflation (measured by the price deflator for personal consumption expenditures or PCE) to reach 2%, Evans said he was worried that professional forecasters might have gotten into the habit of just toeing the central bank's line that PCE inflation would return to that level.

"It reminds me of when I was doing math homework in high school. At least in the US, the answers to the odd-numbered questions are in the back of the textbook. Well, I think everyone answering the Survey of Professional Forecasters is reading the Fed's back-of-the-book answer — our inflation target of 2%," Evans said.

Evans also pointed to a 25 basis point drop in the SPF's predictions for CPI on a 10-year horizon since the last recession and the 50 basis point drop in parallel in the University of Michigan's 5 to 10-year inflation gauge since 2006.

Clearly communicating that the monetary authority was willing to deliver a so-called symmetric outcome for prices would also bolster its credibility, increase its ability to attain its goals during normal times and strengthen its policy framework ahead of any future policy challenges that might arise because of "unexpected financial developments".

"This is not our first bout of unexpectedly low inflation during this policy cycle. For years, the FOMC's Summary of Economic Projections (SEP) have had us reaching our 2% target in another year or two. And for years this hasn’t happened."

"In order to dispel any impression that 2% is a ceiling, our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome, acknowledging a greater chance of inflation at 2-1/2 percent in the future than what has been communicated in the past."

"I also worry that giving too much prominence to financial stability considerations in discussions of monetary policy could erode the public's confidence in our commitment to our 2% inflation objective."