Federal Reserve should raise interest rates gradually, says Evans

Chicago Federal Reserve President Charles Evans struck a dovish tone on Friday, saying the central bank should raise interest rates gradually, emphasising the need for more progress on inflation, although he was optimistic price gains would materialise given job gains and the prospect for easier fiscal policy.

Evans said the Fed should take a cautious approach to rate hikes even as fiscal policies under new US President Donald Trump are expected to boost economic growth.

"Appropriate policy calls for a slow pace of normalisation in order to give the real economy an adequate growth buffer to withstand downside shocks," Evans said in remarks prepared for delivery at Prairie State College in Olympia Fields, south of Chicago.

"I favour taking a gradual path for the adjustment of the funds rate back toward its long-run level."

The Fed on Wednesday decided to keep interest rates unchanged as it waits for further growth in the labour market and for inflation to move closer to its 2% target. The central bank last raised rates in December, the second time since the 2008 financial crisis.

Fed policymakers have said they expect three hikes this year, following the recent pick-up in economic growth.

Evans did not specify how many rate hikes he preferred in his remarks. However, he said three is not "implausible."

"My last submission was two hikes, but you know the way things are going I could see three hikes. I could be comfortable with that," he added.

The Fed official predicts gross domestic product will rise 2.0% to 2.5% in the next couple of years, compared to its long-run sustainable pace of about 1.75%.

He also estimated unemployment will fall to 4.25% over the next couple years, below its long-run sustainable rate of 4.7%. Data on Friday showed the unemployment rate unexpectedly rose to 4.8% in January from 4.7% in December.

Regarding the new administration´s plans for fiscal spending and protectionism, Evans indicated more detail was needed on the former while the latter risked stifling competition, a driver of productivity growth.

"Over the next couple months we'll see more details about what people are doing and how Congress is going to take this up, and then it will be closer to the time to think about how to put that into our forecasts."