Chicago and Cleveland Fed presidents back gradual path for rate increases

Chicago Fed president Charles Evans has declared he is "comfortable" with the pace of tightening implied by the Federal Open Market Committee's (FOMC) so-called dot plots. Cleveland Fed president Loretta Mester has also reiterated her view that "gradual" normalisation will be appropriate in 2016.

According to the ‘Summary of Economic Projections', released on March 16, the median expectation among Fed officials is for a 50-basis point rate increase over the course of the year. This was half the median expectation in December.

The projections implied a further tightening of around 100bp in each of 2017 and 2018. Speaking in New York on March 30, Evans described this as a "very shallow path" that was "appropriate" for the FOMC to follow.

The next day, and speaking in the same city, Mester said it would "be appropriate to continue to gradually reduce the degree of accommodation this year". Though she did not explicitly endorse the path implied by the projections, Mester said she too envisioned a "slightly more gradual path" than in December.

This was, the Cleveland Fed president said, because she had revised her growth forecast down, and anticipated a lower longer-run equilibrium interest rate than a few months earlier. Mester forecasts GDP growth of 2.25–2.5% in 2016, while Evans expects it to fall somewhere between 2% and 2.5%.

Evans highlighted the "relatively solid prospects" for household spending in the US, but also the prospect for international headwinds to weigh on growth. Mester also acknowledged difficulties abroad, but noted the US economy had proven "remarkably resilient".

The Chicago and Cleveland Fed president alternate as voting members on the FOMC. New York has a permanent vote, Chicago and Cleveland share another and the remaining nine reserve banks rotate through three spots on the committee. Mester currently has the vote.

The two officials also share a similar outlook for inflation. Evans believes inflation will return to the 2% "within the next three years", while Mester expects it to hit the target "over the next couple of years".

Evans confessed he was "a bit uneasy" about this forecast, as it was "too early" to gauge whether recent increases in the figures would last. He also pointed to a host of downside risks to his outlook, including the prospect of inflation expectations drifting lower.

Mester, while saying there was good reason to consider these risks, also warned low oil prices could pose an upside risk in the medium term by fuelling stronger-than-expected consumer spending. Forecasting models have, over the past 15 years, tended to underestimate actual inflation, she said.